We bought a home in So. California in December 2004, We are currently underwater on it about $80,000. Our 5-year ARM that was based on Libor recently reached the adjustment date and our home loan went down over $900 per month. Our hope is that we can keep our home, at least until prices rise again and we can sell it as we do not want to damage our good credit, and we are wondering if it is better to take the $900 savings and apply it to reduce our principal or use it for remodeling purposes to bring up the value of our home. It was built in 1989 and has the original bathrooms and kitchen so a remodel is greatly needed and wanted by me! (We do realize that our payment can go up again in 6 months, but it cannot go up over 1% every 6 months so it will take a year at minimum, depending on the Libor, to return to what we were paying.) Any advice?

Thanks!
Vanessa Sunshine :)

Sell it and buy the house next door for half-price.

People w/good credit can short-sell and buy back in immediately (banks say 2 years but private mortgage lenders are going where the banks say they won't go and I predict the banks won't let private lenders keep that market exclusive to them for very long.)

Use what ever money you've saved towards a better investment.

I would evaluate how long (approximately) it will take for the home to gain back the $80k you are upside down, with and without the improvements you want. That will be specific to your market. If staying in the home for that amount of time sounds unreasonable, you may want to get out now. However if you feel like you can hang in there while you get the value back then stay and enjoy the home.

First rule of investing: buy low/sell high.

It's going to take too long and too much mortgage-money to get your home back to where you began. (average non-bubble'd increase is +3%/yr - inflation = a wash)

In the meantime, the neighbors house is half price and it'll be up in value to where you began.

You will not have any equity - and your neighbors house will a 40%-50% gain in value (someday but not in the next 5-10yrs) Your neighbor can access the benefits of HELOCs and such - things they can use to secure a college education or retirement.

If you use it to improve then the best bang for the buck is adding bedrooms or sq footage. Almost nothing else will increase it. Cosmetic enhancements are worth pennies on the dollar in value.

900 extra toward principle would help pay down the gap. I say a little bit of both.