Q: We took out a home equity loan approximately five years ago. We then refinanced a couple of years ago and combined the home equity loan with our mortgage.

Now we would like to buy a house that has a little more room. Our problem is that we owe about $113,000 on our mortgage, which is about what we could get for our home, and that does not include the real estate agent’s commission we’d have to pay.

I don’t see any way to sell and trade up until we are able to pay off more of our mortgage so that we can at least break even when we sell our house. I can afford a slighter higher payment, but I just don’t have the $10,000 that I think I need to get from here to there.

Am I missing something or am I right?

A: You are experiencing the nightmare that economists have long predicted might happen when consumer start tapping their home equity at the same time home appreciation tapers off or even stops.

When you owe more than the house is worth, mortgage lenders say you’re “upside down” in your mortgage. And that’s your situation in a nutshell. If you had to sell your home today, you’d have to bring a $10,000 check to the closing table to pay off everything.

Actually, you’ll probably owe even more because in addition to the real estate agent’s commission, there are other costs and fees (like transfer taxes) that the seller may have to pay in order to close on the sale.

Your only way out would be to sell by owner, but that still wouldn’t exactly put you in a great position — you’ll walk away from this house with nothing, and that’s if everything goes your way.

My best advice to you is to stay in this house, although it is a little on the small side. You might also want to take a second job for the next six months or so, and devote all of that pay toward building up some much-needed equity in your home.

Give yourself a year or two of making extra payments and you might be in a stronger position to afford that bigger house.

Published: Aug 27, 2004