I'm not sure using tax-protected funds will really protect you from your lender either way (whether on your new home or your old). Probably the best bet is to stay put (if you can) and wait/hope for the value of the home to increase, which is what they all seem to be doing right now. Not sure how long (if ever) it will take, but one way or another you're going to have to pay the piper (whether it is with the credit ding of a short sale or the lender coming after you for the amount owed after the dust settles), and the best way to minimize that cost is to wait it out as long as you can.
If you can't stay put, perhaps you can rent out the house to cover some/all of the costs while you wait out the market, but that will mean less ability to buy in the new location.
Refinancing would be a critical piece of any plan to hold the property, as you can bring your monthly costs way down, making it easier to hold on until the market rebounds. Best of luck...
I can recommend Mr. Steven Colon he's a great Real Estate Attorney and also knows a great deal about taxes. He also has a Tax Business, you can sit down with him and he will go everything. His contact number is 646-623-9431 and office 646-556-6620.
Best of Luck!
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3928 E. Tremont Avenue
Bronx, NY 10465
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Rey Hollingsworth Falu, CDPE
It is very important that you speak with a mortgage broker for what you are suggesting. I highly recommend calling Dominick Sutera (he is an instructor to mortgage brokers). Dominick can be reached at (516) 249-4800 or dsutera@BankAMC.com.
Dominick can explain he entire process and what to expect. Call him for a free consultation.
Have you looked into modifying your loan to a lower rate, as the rate is approx. 3.25% at this time.
If your bank is not willing...try a Mortgage Banker who has access to many banks rather than one.
If you would like some names of Mortgage Bankers, just give me a call and I would be glad to share them with you.