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How to Solve Your Negative Equity Problem


One out of every ten homeowners in America owe more on their mortgages than the value of their homes. You may want to consider the "cash-in mortgage" strategy if you're in that situation. You can use this strategy to reduce your mortgage in order to refinance your loan into a lower payment.  You can also use the strategy to sell the property without having to do a short sale.

Cash-in Mortgage Refinance

Using cash to pay down your mortgage may allow you to refinance into a lower interest rate and lower your monthly payments. For example, consider a homeowner who owns a $200,000 home that has declined in value to $150,000. The picture illustrates what would happen if the homeowner uses $60,000 in cash to reduce the balance of their $180,000 mortgage to $120,000.  As you can see, this would result in extra cash flow of $623 per month.  There are two steps to determine the financial impact of this strategy: 

  • Step 1: $623 monthly savings x 12 = $7,476 annual savings
  • Step 2: $7,476 annual savings / $60,000 investment = 12.46% Cash on Cash ROI

How would you like to earn 12.46% tax-free (and risk-free) rate of return on your $60,000 investment?

This strategy makes sense as long as you are currently earning less than 12.46% after-tax on your $60,000. There are two ways to get the $60,000 in cash to make this strategy work:

  • You can use cash from your bank accounts that may be currently earning you 0% or 1% interest; and/or,
  • You could sell some of your other investment assets that are earning you less than 12.46% after-tax.

Either way, the strategy makes sense as long as you can earn a higher after-tax return on your money by paying down your mortgage than you would by leaving your cash wherever it is right now.

Cash-in Mortgage to Sell Your House

The cash-in mortgage strategy can be used to eliminate negative equity and sell your home without pursuing the short sale option. For example, consider a homeowner who owns a $200,000 home that has declined in value to $150,000. If the homeowner rents out the property, they would end up with negative cash flow of $400/month. Here's what would happen if the homeowner sold the house for $150,000 by using $42,000 in cash to reduce the balance of their $180,000 mortgage to $138,000:



Again, there are two steps to determine the financial impact of this strategy:

  • Step 1: $400 monthly savings x 12 = $4,800 annual savings
  • Step 2: $4,800 annual savings / $42,000 investment = 11.42% Cash on Cash ROI

This strategy makes sense as long as you are currently earning less than 11.24% after-tax on your $42,000. There are two ways to get the $42,000 in cash to make this strategy work:

  • You can use cash from your bank accounts that may be currently earning you 0% or 1% interest; and/or,
  • You could sell some of your other investment assets that are earning you less than 11.42% after-tax.

Either way, the strategy makes sense as long as you can earn a higher after-tax return on your money by paying down your mortgage and selling your home than you would by leaving your cash wherever it is right now. There are two additional benefits with this strategy:

  • You eliminate the headache and need to manage tenants if you rent out the property; and,
  • You protect your credit rating from any adverse impact that may occur from pursuing the short sale or foreclosure option.
Conclusion

It's always advisable to consult with a Certified Mortgage Planning Specialist (CMPS®) when navigating today's turbulent mortgage and real estate marketplace. I'd be happy to review your situation and help you compare your options.  Contact me for more information!