Pay down on second mortage when underwater?
I'd split whatever cash flow you have between saving money and paying down the 20% loan. The fact that you are carrying an unrealized loss isn't really too relevant -- unless you have plans to walk away from the loan or go bankrupt, it doesn't really matter until you sell. You're either going to repay now or later. "You're welcome to throw in the towel and stop paying any time you want.  You'll just suffer the consequences of doing so. It sounds like you're concerned about losing your job ""in the next few years.""  What are you doing to stem this off?  Are you building up a side income?  Are you building up portable skills -- ones that can be used anywhere?  If you think you have a few years left, use them.  Build something up.  You may be able to recover more quickly, or last longer until you find a new job. Some of my blogging friends have been at it about as long as I have, and they're in high-five, low-six figures now.  For blogging.  Some did it even faster.  All it takes is time.  Your expenses for starting a blog are $10/month plus cutting out two hours of TV / drinking / anything else consumer-ish to learn more about your favorite interest, write about it, and interact with the online community. That's just one idea.  Season to taste or choose a different meal altogether. Are you frugal?  Are you looking for ways to cut expenses?  If you can find extra money to save a little bit more and knock out just one of those debts (say, the car), you'll be able to throw that payment at the student loan.  Then they'll both be gone, and you can save up a cushion for yourself faster. I just think it's a little weak to give up when you're not really in trouble yet.  You're tight, but you can get through that." If you're planning to walk away from the house - don't invest any more money in it. Just be aware of the consequences. It may be worth considering a short sale if both the lenders will agree to erase the debt. If you're going to keep the house, then the fact that you're underwater now is irrelevant, and you should do your best to reduce the burden by paying off the higher rate loan. But, I personally think that accumulating enough cash to make you comfortable in case of a job loss for several months is a higher priority. I think everyone else answered before you added the info about your car loan in your comment. While it makes sense to pay off loans with the highest interest rate first, keep in mind that in most cases you can deduct mortgage interest from your taxable income. So the after-tax rate of interest that you're paying on your 8.6% second mortgage will be less than your 7% car loan, assuming that your tax bracket is more than 18% (federal and state combined). If you plan to use your funds to pay down debt, definitely attack the car loan first. "Well, I suppose it depends on your idea of a ""lost cause"". Are you planning to lose the house to foreclosure?  If so, then yes, it's a lost cause.  Don't waste your money paying down the principal. In any other scenario* you should absolutely pay down the principal to the extent that you'd pay down any loan with nearly 9% interest (in other words, moderately aggressively). The fact is, you owe someone $265,000 unless you plan on losing the home to foreclosure.  You can manage the amount of interest you pay while you hold that debt by paying it down. * Short sale and bankruptcy would be special conditions as well, but not exactly the same effect as foreclosure." There are programs out there which will let you refinance even when underwater, under the Government's HARP program. You are overpaying by nearly $7,000 per year compared to a refinance to 4.5%. A classic example of how the bubble hurt people who overextended themselves a bit as housing shot up.  The bank risks a $50K loss if you default or short sell this property. I'd go in and sit down with a branch manager and ask what they can do to recast the loan to a lower rate as you are ready, wiling and able to keep the house and make your payments. Good luck.
"It's legal. That's what a home equity loan is, for example. More generally, what you're talking about is a ""second mortgage"". It has no effect on the primary mortgage that you've already made to your bank; they're still secured, and if you get foreclosed, they get paid, and only if there's something left over does the second mortgage holder get anything. That's why second mortgages are more risky than first mortgages, and why you might have trouble finding someone willing to do it." You're not crazy, but the banks are. Here's the problem: You're taking 100% LTV on property A - you won't be able to get a second mortgage for more than 80% total (including the current mortgage) LTV. That's actually something I just recently learned from my own experience. If the market is bad, the banks might even lower the LTV limit further. So essentially, at least 20% of your equity in A will remain on the paper. Banks don't like seeing the down-payment coming from anywhere other than your savings. Putting the downpayment from loan proceeds, even if not secured by the property which you're refinancing, will probably scare banks off. How to solve this? Suggest to deal with it as a business, putting both properties under a company/LLC, if possible. It might be hard to change the titles while you have loans on your properties, but even without it - deal with it as if it is a business. Approach your bank for a business loan - either secured by A or unsecured, and another investment loan for B. Describe your strategy to the banker (preferably a small community bank in the area where the properties are), and how you're going to fund the properties. You won't get rates as low as you have on A (3.25% on investment loan? Not a chance, that one is a keeper), but you might be able to get rid of the balloon/variable APR problem. "I've found that once people ""fall in love"" with a home or the idea of a home, there's little chance they will chance course.    I'd implore you to do some reading about individuals and families trapped in an underwater mortgage and having lost a job -- now they can't move for work, and they can't refinance or sell.  In short, they are trapped and will be foreclosed upon (or, at best, will short-sell).  If you want to play knife-catcher (e.g., trying to buy an asset while its value is falling) then at least don't go in blind or kid yourself about the risks.  Of course, many folks believe the housing market has bottomed - if that's true then there's no harm in waiting 6 or 12 months and verifying that premise.  At most, you'll lose a couple of points in equity.    On the other hand, you may well discover that all is not well, and suddenly you can ""afford"" even ""more"" house.  It is not hyperbole to say that the housing market in the USA has financially destroyed millions of people -- be careful out there especially as Europe comes unglued." There are two scenarios that I see. You have a mortgage on the property. Generally the insurance company sends the funds to the lender, who then releases the funds to you  as you make the repairs. They do it this way because if you never make the repairs the value of the collateral is decreased, and the lender wants to protect their investment. There is no mortgage. You will get the funds directly, and the insurance company will not force you to make the repairs especially if the repairs are cosmetic in nature.  In either case if you don't fix the cause of the leak, and make repairs to the site around the leak, you will run into a problem in the future if the leak continues, or the rot and mold continues to spread.  If you file a future claim they are likely to ask for proof of the original repair. If you didn't make it, they are likely to deny the second claim. They will say the cause is the original incident and if you had made the repair, the second incident wouldn't have happened. They are likely to drop you at that point. If you try to sell the house you will have to disclose the original leak, and the potential buyers will want you to make the repairs. Any mold or rot spotted by the home inspector will be a big issue for them. It is also likely to be an item that they will be advised to demand that you get a legitimate company to make the repair before the deal can move forward, and won't negotiate a lower price or a credit for $x so they can get the repair done. Some will just cancel the deal based on the inspection report. "If it was me, I would sell the house and use the proceeds to work on/pay off the second.   You don't speak to your income, but it must be pretty darn healthy to convince someone to lend you ~$809K on two homes.  Given this situation, I am not sure what income I would have to have to feel comfortable.  I am thinking around 500K/year would start to make me feel okay, but I would probably want it higher than that. think I can rent out the 1st house for $1500, and after property management fees, take home about $435 per month. That is not including any additional taxes on that income, or deductions based on repair work, etc. So this is why.  Given that your income is probably pretty high, would something less than $435 really move your net worth needle?  No.  It is worth the reduction in risk to give up that amount of ""passive"" income.  Keeping the home opens you up to all kinds of risk.  Your $435 per month could easily evaporate into something negative given taxes, likely rise in insurance rates and repairs.  You have a great shovel to build wealth there is no reason to assume this kind of exposure.  You will become wealthy if you invest and work to reduce your debt." I'd pile up as much cash as you can in a savings account - you will need money for the move (even if it's just gas money) and it's going to be hard to predict where house prices are going so you might or might not be underwater when it comes time to sell the house. Or you might be so deep underwater by then that the extra money doesn't make much of a difference anymore anyway. Once you're actually in the process of selling the house, you can figure out if you can (or need to) use the savings to cover the shortfall, closing costs or if you just built up a little wealth during the time you put the money aside. A second mortgage is a loan taken out on your house while you still have another mortgage secured by your house. They are a secured loan as they use the borrower’s home as security. Some advantages of Second Mortgages: Some important points to consider when you take a second mortgage If you stop making payments, your lender will be able to take your home through foreclosure, which can cause serious problems for you and your family. Second mortgages can be expensive. You’ll need to pay numerous costs for things like credit checks, appraisals, origination fees, and more. The mortgage rates are typically lower than credit card interest rates, but they’re often slightly higher than your first loan’s rate. The market can stay irrational longer than you can remain solvent -John Maynard Keynes The stocks could stagnate and trade in a thin range, or decline in value. You assume that your stocks will offer you ANY positive return for every month over 24 months. Just one month of negative returns puts you underwater. Thats whats wrong with it.  Even if you identified any stock that has been up every month for a consecutive 24 months in the past, there is nothing that says it will be so in the future, and a broad market selloff will effect both indexes as well as individual stocks.  Literally any adverse macroeconomic event in the next two years will put you underwater on your loan, no matter how much research you do on individual stocks. It is highly unlikely that this would be approved by a mortgage underwriter.   When the bank gives a loan with a security interest in a property (a lien), they are protected - if the borrower does not repay the loan, the property can be foreclosed on and sold, and the lender is made whole for the amount of the loan that was not repaid.   When two parties are listed on the deed, then each owns an UNDIVIDED 50% share in the property.  If only one party has pledged the property as surety against the loan, then in effect only 50% of the property is forecloseable.  This means that the bank is unable to recoup its loss.   For a (fictional, highly simplified) concrete example, suppose that the house is worth $100,000 and Adam and Zoe are listed on the deed, but Adam is the borrower for a $100,000 mortgage.  Adam owes $100,000 and has an asset worth $50,000 (which he has pledged as security for the loan), while Zoe owes nothing and has an asset worth $50,000 (which is entirely unencumbered).  If Adam does not pay the mortgage, the bank would only be able to foreclose on his $50,000 half of the property, leaving them exposed to great risk.   There are other legal and financial reasons, but overall I think you'll find it very difficult to locate a lender who is willing to take that kind of risk.  It's very complicated and there is absolutely no up-side.   Also - speaking from experience (from which I was protected because of the bank's underwriting rules) and echoing the advice offered by others on this site: don't bother trying.  Commingling assets without a contract (either implicit by marriage or explicit by, well a contract) is going to get you in trouble. Let's say you owe $200K (since you didn't mention balance. If you do, I'd edit my response), and can get 4.5%. You'd save 1.5% or about $3K/yr the first few years. If a $12K paydown is all that's between you and and refi I'd figure out a way.  There are banks that are offering refi's under the HARP program if your current mortgage is owned by FNMA or FMAC which permit even if under water. So, the first step is research to see if you can refi exactly what's owed, failing that, shop around. A 401(k) loan will not appear as a loan on your credit report, that may be one way to raise the $12K. The best thing you can do is put all the savings into the 401(k) to really get it going. You definitely can under those conditions. Just be very careful to specify that you are making extra principal payments. I have this exact same issue.  Event the dollar amounts are close.  Here is how I am looking at the problem. Option 1:  Walk away.  Goodbye credit for 7+ years.  Luckily I can operate in cash with the extra $800 per month, but should I have a non medical emergency I might be SOL.  With a family I am not sure I am willing to risk it.  What if my car dies the month after I quit paying and the bank chooses to foreclose?  What if my wife or I lose our job and we have no credit to live? Option 2:  Short sale.  Good if I can let it happen.  I might or might not be on the hook for the balance depending on the state.  If I am on the hook, okay, suck but I could live.  If I am not on the hook, it is going to hurt my credit the same as foreclosure.  It isn't easy, you need an experienced real estate agent and a willing bank.   Option 3:  Keep paying.  I am going for this.  At the moment I can still afford the house even though it is at the expense of some luxuries in my live.  (Cable TV, driving to work, a new computer).  I am wagering the market fixes itself in the next several years.  Should the S hit the fan in most any manner, the mortgage is the first thing I stop paying. I don't know what other options I have.  I can't re-fi; too upside down.  I can't sell; the house isn't worth the mortgage (and I don't have the cash for the balance).  I can't walk away; the credit hit wouldn't be worth the monthly money gain. I have no emotions about the house.  I am in a real bad investment and getting out now seems like a good idea, but I am going to guess that having the house 10 years from now is better than not.  I don't care about the bank at all, nor do I feel I owe them the money because I took the loan.  They assumed risk loaning me the money in the first place.  The minute it gets worse for me than for the bank; I will stop paying. Summary Not much to do without a serious consequence.  I would suggest holding out for the very long term if you feel you can.  The best way to minimize the bad investment is to ride it out and pray it gets better.  I am thinking I am a landlord for the next 10 years. I'll preface this with saying that I'm not a finance or real estate professional, this is just how I understand the situation and what I'm doing:  We just got a 30year/FHA mortgage, there's no prepayment penalty, and no fees associated with paying it biweekly. In fact (Wells Fargo), while the payments get withdrawn biweekly, they don't actually post to the mortgage until there's enough for a full payment.  So essentially here are the benefits I'm realizing: While this question is old and I generally agree with the answers given I think there's another angle that needs a little illuminating: insurance. If you go with an 84 month loan your car will likely be worth less than the amount owed for substantially all of the entire 84 month loan period; this will be exacerbated if you put zero down and include the taxes and fees in the amount borrowed.  Your lender will require you to carry full comprehensive/collision/liability coverage likely with a low maximum deductible.  While the car is underwater it will probably also be a good idea to carry gap insurance because the last thing you want to do is write a check to your lender to shore up the loan to value deficit if the thing is totaled.  These long term car loans (I've seen as high as 96 months) are a bear when it comes to depreciation and related insurance costs. There is more to this decision than the interest calculation.   Obviously, if you had the cash at the front of this decision presumably you'll have the cash later to pay off the loan at your convenience.  But while the loan is outstanding there are costs beyond interest to consider. "You owe $20,000 to a loanshark, 1% per week interest.  I'm happy to get 1% per month, and trust you to pay it back, so I lend you the $20,000.  The first lender got his money, and now you are paying less interest as you pay the loan back. This is how a refi works, only the first bank won't try to break the legs of the second bank for moving into their business.  This line ""reinvested the money into the mortgage to lower his monthly payments"" implies he also paid it down a bit, maybr the new mortgage is less principal than the one before."