I initially rented my rooms as a way to pay for graduate school, but in May 2009, I graduated with my degree and no longer have tuition to pay for. Since tuition is no longer a priority, I still continue to rent out my rooms, but use the income to pay off my mortgage debt sooner.
My Mortgage Debt Situation
I was able to buy my townhouse with no money down by securing an 80/20 mortgage loan, which is taking out two mortgages. The first mortgage is 80% of the sale price while the second mortgage is 20% of the sale price. The second mortgage “acts” as the down payment, but comes with a catch — a higher interest rate.
In 2008, with low interest rates, I tried to refinance both or either one of my loans. But the banks wouldn’t even look at me because my loan-to-value ratio was greater than 0.8. My total mortgage balance at this time was about $173k while my property was worth about $175, making my loan-to-value .98($173k/$175k).
In order to refinance, I would have to make my loan to value ratio less than .80. The biggest burden on my shoulders is my second mortgage. The balance on this mortgage was $35,528.39 in May of 2009(see screen shot below). The plan was to pay this off as soon as possible.
Using the rental income, I was able to bring the balance of the second mortgage from $35,528.39 to $22,101.67 by consistently paying at least an additional $500 a month towards the principle and making other one-time payments when I had extra money(see screen shot below).
At this rate, I should have the second mortgage paid off in early 2012. It’s a while away, but at least I have a plan. Once it’s paid off, I can refinance my first mortgage.
There are other people who are in the same boat as I am. Some of them chose to default on their mortgage by simply walking away from their mortgage because they are completely underwater and feel there is no reassurance of their local market turning around. The repercussions from walking away can be severe depending on what caused the default.
With the rental income, I was able to reduce the balance of my second mortgage from $35,500 to $21,100, a reduction of about 40% in about 14 months. This real life situation of debt reduction clearly shows the financial relief the rental income provides. Without the rental income, I would be making the regular payments on the second mortgage and finally paying the loan off in 2035.
Have you tried to see how much debt you can eliminate with rental income?