In an Interest-Only Pinch

Russ is about to hit Baby Step 4. However, he bought a $203,000 home on an interest-only loan. He can't refinance because it's worth $155,000 and he owes $190,000. What should he do now?

QUESTION: Russ in Salt Lake City is about to hit Baby Step 4. However, he bought a $203,000 home on an interest-only loan. It’s about 35% of his income, which makes it difficult to contribute 15% to retirement. He can’t refinance because it’s worth $155,000 and he owes $190,000. What should he do now?

ANSWER: You’re going to have to crank that down until you can get this mortgage solved. You are stuck in that mortgage until one of two things happens. One is you pay down the mortgage to where you can get it refinanced. The other is the value of the home comes up and, of course, over time your household income will likely go up. Most people’s income does. Then it begins to solve itself in that sense.

I’d be trying to assess those three things and figure out which one is going to move fastest; the debt reduction, the value increase, or your income going up. But until you’re able to get this rectified and get it on a good mortgage rate and get it fixed onto something other than a stupid interest-only loan, you are probably stuck with a little less going into retirement.

I’m sure hoping your value doesn’t stay down five years. I doubt this is a five-year plan, and I think your income will go up during that time as well, so hopefully this is more like a two- or a three-year plan. That’s probably the way I would view it.

If you want to hold off for two years and just attack the mortgage while we are trying to see if these values will recover and your income will come up, that’s an okay thing. I just don’t want you to avoid retirement forever playing games with stuff. If you look up five years from now and you are still sitting in this mess, you need to sell the house.

Let’s get it straightened out in two or three years, or let’s start talking about how we’re going to get out of this house.

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