Thread: Sell underwater Townhouse to buy Single Family House?

Hi There!

I am currently in a tricky situation, and need expert advice. Situation - We (me and my husband) bought a new townhouse in 2007 for 500,000$ with 5% down payment (~25000$) with 30 yr fixed loan term (Mortgage/month ~ 3200). We bought the house thinking that the amount we pay for rent at a nice neighborhood for an apartment would go towards our monthly mortgage. Back then, we had planned to buy a bigger single family house (4+ br ~ 800,000$) few years down the line, once our equity had been build on the townhouse. Unfortunately, the market crashed and our house value decreased considerably. Currently, the house is valued at 400,000$ and we owe 420,000 to the bank (Initial Amount-Amount we payed through mortgage). We have again started saving for the bigger house, but we will only be able to put 10-13% down payment after 2 years.
Since we have to buy a bigger house for our family and other personal reasons, I was wondering would be the most appropriate strategy.
1. Sell the townhouse after 2 years - we save the interest on future mortgage for townhouse, but sell the townhouse for lesser value than its original cost.
2. Sell townhouse after 4 years - save a bigger amount for the down payment for single family home. Also, depending on the market we might sell it for higher price than if we sell it after 2 years (but again, depending on the economy we might have to sell it for lower price)
3. Pay 2 mortgages - townhouse and buy single family. Wait for the equity to build on townhouse, and save for single family. Should we be considering buying bigger home in 2 years or 4? Since we are not making any profit from the townhouse, I would like to buy the single family at a relatively lower price.

Any advice would be greatly appreciated!
Thanks a lot!
Shubhi