Expert: Lori Frankfort - 1/2/2008

Question
QUESTION: Does it make sence to take a second on a home that is paid off infull in order to buy a house?  When the market is low?  IE: A house in California worth $300,000 today but worth $400,000 6 months ago.  Second the house for $250,000 and buy a $200,000 home in Missouri while using the other $50,000 to make payments on the 2nd morgage until the house in California goes back up and sell?  The California house is rented at $1,300 a month.

ANSWER: It makes sense if you're trying to move to Missouri, but I don't know the situation with the Missouri real estate market and whether or not it's a wise investment.  You have to keep in mind the following: 1) It may be a long while before the California market comes back... if your rents can sustain your new mortgage for years to come, then that's great.  2) It doesn't matter what your house was worth 6 months ago - it will have to be appraised for today's value in order to get a new loan on it.

If you want to be more specific with questions I'd be happy to answer more.

Best,
Lori Frankfort

---------- FOLLOW-UP ----------

QUESTION: I live in Missouri and I inherited this house about a year ago. I have a small house but just got married 6 months ago and would like to start a family.  Rent is only $1,300 a month which would be less than the mortgage but what about using the $50,000 to make payments on the 2nd for a year and if the housing market still isn't up sell in California and payoff second?

Answer
You could definitely do that, but keep in mind that the market may not go up in the short term, it could take years to recover.  You run the risk of it falling more, and surpassing the $50,000 you are using to make the shortfall of the mortgage payments.  You also have taxes and insurance to factor in.  I think your best bet would be to sell in the near-term rather than being upside down each month and the potential for it to get worse.  No one really knows what is going to happen with the market, and I would hate to see you stuck with a house that keeps depreciating.  Those are my opinions.

Best,
Lori Frankfort