“After being in my house for a year, I learned that the market value is considerably less than the appraised value. I was obviously deceived by the builder and the appraiser. Who do I talk to about that?
My mortgage was for the full appraised value. I want to stay in my house, but I don’t want to pay for a mortgage that is for more than the house is worth. Is there any way I can get the lender to reduce my note to the real value of the house? I thought I might sell, but the new appraisal is for considerably less than the mortgage balance.”
You may have paid more than the house was worth at the time, as builders typically charge what the traffic will bear. There is no law against charging more than something is worth if a buyer is willing to pay it. Being unduly influenced by an appraiser working for a builder is a terrible mistake, but an understandable one for a home buyer to make. It is less excusable when made by a lender, who is supposed to know better.
An alternative and perhaps more plausible explanation is that you bought when prices in your area were at their peak, paid the market price at the time, and prices have since tumbled. Nobody is to blame for that — house prices usually rise but occasionally they drop — and you were unlucky enough to be caught by one.
One of the reasons I advise people to avoid 100 percent loans if they possibly can is that a price drop is always possible. If it happens, you owe more than the house is worth, making the mortgage payment a torment and a sale impossible without finding another source of cash.
The lender is not voluntarily going to share your torment by writing down the size of the mortgage. If your house had appreciated, you wouldn’t have shared the capital gain with the lender, and now that it has depreciated, the lender is not going to share the capital loss with you.
Of course, if you default, the lender will indeed share your capital loss, but it will be involuntary.
Sell Now to Avoid Future Capital Gains Taxes?
“My wife and I own a home that we bought years ago at $200,000 and is now worth about $700,000. If we stay in the house for another 10 years and then sell, and the value then is $1.2 million, we will be liable for a capital gains tax on $500,000. This is the total capital gain of $1 million less the capital gain exclusion for a couple of $500,000.
If we sell now, on the other hand, and immediately purchase a similar house, we pay no capital gains taxes. The $500,000 gain exclusion would be applied when we sell now, and it would be applied again when we sell after 10 years. Question: should we sell now to avoid the future tax?”
This question comes down to a comparison of the value of the tax avoided 10 years down the road with the cost of moving now from one house to another.
This is far from an exact science because, among other things, we don’t know what the capital gains tax rate will be 10 years from now. The best we can do right now is use the current rate of 15 percent, but it could be higher or lower.
At 15 percent, the tax on $500,000 would be $75,000, but that is 10 years in the future. What it is worth today depends on the interest rate. At 6 percent, for example, $75,000 10 years in the future is worth about $42,000 today. [Note: That is another way of saying that $42,000 invested at 6 percent would be worth $75,000 in 10 years.]
What is the cost of selling one $700,000 home and buying another one? The financial cost will almost certainly be higher than $42,000. A 6 percent sales commission is, by coincidence, exactly $42,000. Commissions can be lower, of course, but there are other costs on both the sale and the purchase that can be steep, including transactions taxes, settlement costs on a new mortgage, and moving costs.
And then there is the pain and the hassle. If the two transactions can’t be perfectly synchronized, which is seldom possible, you have to find temporary housing if you sell first, or perhaps a source of temporary financing if you buy first. And then there is the pain of moving all your possessions out of one house and into another. The list goes on and on. Everyone must call their own shots on something like this, but to me it is a no-brainer. I would stay put.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
