To sell, however, you’d have to expect a 6% real estate agent’s commission. So, with 2% appreciation, it would take 81 months to break even.
Can you speed the process? Well, a higher appreciation rate would do that, but that’s almost entirely out of your control. That leaves prepayments, which would reduce the outstanding debt faster. By putting an extra $200 a month into the mortgage, you could get above water and pay the agent’s commission after 65 months instead of 81.
HSH’s KnowEquity How calculator uses similar calculations to show how much you’d have to put into the mortgage to get above water by a certain deadline, such as your retirement date.
Keep in mind that prepayments aren’t necessarily the best way to resolve your mortgage problem. As an alternative, you could invest the extra cash in some other way that might be more profitable, then add those bigger gains to the proceeds from selling the home to pay off the loan.
The example assumes a mortgage rate of 6.5%, about the going rate in 2007. Prepayments would therefore earn a 6.5% “return” by allowing you to avoid interest charges at that rate. If you could earn more elsewhere, that would be a better option. Of course, the 6.5% return on prepayments is guaranteed. To beat that you’d probably have to take more risk.
The homeowner in the example might consider one more option: using spare cash to pay the debt down in one step, so the loan could be refinanced, reducing the 6.5% interest charge to today’s rate of around 4%. That would put the loan above water right away, reduce the required payments, and dramatically cut interest costs throughout the life of the loan.
If you’ve given up on your underwater home, here are some tips about the dangers of walking away from it.