Mortgage Fees to Avoid

By Robert J. Bruss
Saturday, June 10, 2006

Q: DEAR BOB: Which home mortgage fees are proper for a lender to charge borrowers? I recall you said some fees are unnecessary and should be avoided. -- Stephen O.

A: DEAR STEPHEN: Mortgage lenders seem to work 24 hours a day, seven days a week, to create new names for unnecessary fees to impose on borrowers who have no clue when they are being ripped off. However, there are many honest mortgage lenders who won't try to impose unexpected last-minute fees.

I suggest you start shopping among at least a half-dozen mortgage lenders for a no-cost, no-fee home loan. In today's mortgage market with rising interest rates, I recommend obtaining a fixed-rate mortgage. However, if you are certain you won't keep your home more than five years, then an adjustable-rate mortgage fixed for five years can save you some money on interest. Be certain the loan does not contain a prepayment penalty or negative amortization, where the interest rate adjusts monthly or semi-annually and unpaid interest is added to your loan balance.

If you are dealing with a direct lender, such as Wells Fargo, Bank of America or Countrywide, the lender's good faith estimate must reveal all loan charges. You might be asked to pay legitimate fees to third parties, such as for the appraisal, credit report and lender's title insurance fee.

However, if you are dealing with a middleman, such as a mortgage broker, his written good-faith estimate might be less reliable. That's because the broker often says, "I got you the best mortgage, but the lender imposed these unexpected fees at the last minute. Take it or leave it."

Unnecessary fees often have creative names, such as underwriting fee, document preparation fee, loan-review fee, warehousing fee or loan-origination fee.

If the lender asks you to pay a loan fee of 1 or 2 percent of the amount borrowed, usually called points, ask how much reduction you will receive in the loan's interest rate. For each one point loan fee paid, you should receive at least a one-eighth percent reduction in your loan's interest rate for the life of the mortgage. Pay a loan fee only if you expect to stay in the house at least 10 years. Otherwise, take the no-cost, no-fee mortgage with all lender charges included in the interest rate.

DEAR BOB: My widowed mother died recently and the lawyer who prepared her trust wants to charge an outlandish fee just to fill out the death papers for the court for her small estate. Is it possible I could file the papers myself with the court? Where do I obtain them? -- Eugene B.

DEAR EUGENE: If your mother left her major assets in a revocable living trust, as I recommend, no probate court proceedings are required. However, if she left a will with a testamentary or irrevocable trust, then probate court proceedings are usually required. This is not a do-it-yourself project.

Shop around among probate lawyers. Although state law sets the maximum probate attorney fees allowed, based on the gross value of the deceased's estate, most probate lawyers will "adjust" their fees downward if you ask, unless there are lots of complications or a will contest involving the heirs.

DEAR BOB: We phoned our neighbor to ask him to quiet his barking dog and stop running his tractor and spewing carbon monoxide near my disabled daughter's room. In response, he built a tall fence. I live on a lake and had a nice view from my kitchen window for 28 years. The neighbor has lived next door for 17 years, but the couple is now divorcing. What chance do I have to either remove part of the fence that blocks my lake view or cut it down by two feet? He moved out but still owns the house. The wife seems amenable to being reasonable. What recourse do I have? -- Elly W.

DEAR ELLY: Unless your city or county has a view protection ordinance, you have no legal right to a view. However, if the neighbor's tall fence is defined by local ordinance as a "spite fence," usually six feet or taller built without a required building permit, you may have a legal right to have the fence removed. For details, check with a estate lawyer.

DEAR BOB: In 1988 my husband and I bought a house together. In 1994 we divorced and I changed the title to my name. In February we got back together and remarried in May. I added his name back to the title. If we sell our home within a year and file our income tax returns jointly for 2006, can we claim the $500,000 home sale tax deduction? -- Rita R.

DEAR RITA: Not yet. For your husband to qualify for an additional $250,000 principal residence sale tax exemption, Internal Revenue Code 121 says he must occupy the principal residence at least 24 of the 60 months before its sale. However, he does not have to be on the title if he meets the 24-month principal residence occupancy test and you both file a joint income tax return in the year of principal residence sale. Consult a tax adviser for details.

DEAR BOB: I am interested in finding out who is buying the house next door to mine. The sale is pending. Is there any way to learn other than asking the buyers or realty agents directly? -- Carole B.

DEAR CAROLE: Until a home sale closes and the title transfer is recorded, the real estate agents and the other parties handling the transfer cannot legally disclose who is buying the house. Nor can they reveal the purchase price without breaching their fiduciary duty to the seller and buyer. The only way to find out the buyer's name now is to ask the seller, but that individual doesn't have to disclose the buyer's name.

DEAR BOB: I feel the sellers from whom I bought my home did not disclose a material and expensive problem with the house. The neighbors tell me the previous owners tried extensive repairs over the years to remedy the problem but did not succeed. Is there any way I can learn the disclosures the sellers of my house were given when they purchased? -- Diane S.

DEAR DIANE: You have no legal right to obtain the written disclosures made to your seller unless that information is public information, such as local building permits or pest control inspection report. Of course, if there are any warranties, such as a 10-year roof warranty, you are entitled to the balance of that warranty period. Consult a lawyer for details.

DEAR BOB: I gave my tenant the required notice to move, confirmed with a receipt of notice. She agreed to move out, but the unit is now locked, no one is there and her car is parked in the driveway. I phoned several times but got no reply. What options do I have? I already hired a contractor to update the unit, based on the tenant's promise to move out on schedule. -- Paras R.

DEAR PARAS: Consult a lawyer whose specialty is evictions. I'm sure you have thought of the several possibilities, such as the tenant moved out but left the car, abandoned the apartment and the car, died either in the apartment or elsewhere, is in a hospital or jail, is avoiding you because she refuses to move out, or wants to drag out the eviction procedure to obtain as much free rent from you as possible.

All these situations have happened to me with my rentals. Ask the neighbors if they have seen your tenant or any activity at the rental. Then contact the local police to learn if they have any record of activity at the property or if they can trace your missing tenant. After that, follow your lawyer's advice to regain possession of your rental unit.

DEAR BOB: Several years ago, my mother gave her house to me because she was moving into her new husband's home in Florida. Now I want to sell that house. But my tax adviser says I am stuck with my mother's low cost basis of only $23,000 whereas the house is worth around $375,000 today. At the time of the gift the house was worth about $225,000. Will I have to pay tax on all that capital gain? -- Alan P.

DEAR ALAN: Your tax adviser is correct. The general rule for gifts is the recipient takes over the donor's basis for a property. Unless the property is your principal residence and you have owned and occupied it at least 24 of the 60 months before its sale so you can qualify for the $250,000 tax exemption of Internal Revenue Code 121 (up to $500,000 for a qualified married couple filing jointly), your capital gain will be taxable. The good news is the federal capital gain tax rate is only 15 percent.

DEAR BOB: Last year my husband bought a house in his name on the title and mortgage, but I help him pay the mortgage payments and property taxes. What is the best way for him to transfer to my name 5 percent of the property? How much will it cost? My husband paid a 20 percent cash down payment. -- Patricia S.

DEAR PATRICIA: If you will be receiving only a 5 percent interest in the property, that means you will probably want to hold title as a tenant in common with your husband, who will retain a 95 percent interest. Each of you needs valid written wills to pass your interests upon the death of either of you to whomever you each designate.

Your husband can convey a 5 percent interest in the house to you by a recorded quitclaim deed. The deed should include a legal description of the property, the percent interest transferred to you, the official parcel number, the method of holding title, and his notarized signature so the deed can be recorded. Consult a lawyer for details.

DEAR BOB: My parents divorced in 1995. The judge gave the house to my mom but she had to either sell it or keep it and refinance the mortgage. She wanted to keep the house, but she couldn't refinance because her debt-to-income ratio was too high. My mother gave me a quitclaim deed, signing the house over to me, and I helped her refinance with a new mortgage. Now I want to get my name off the title and put my mother back as sole owner, as she desires. If I do that and my mother dies, am I responsible for the mortgage payments although I don't hold title? What do I need to do to quitclaim the house title back to my mom? Do I need to go through a title company? -- David P.

DEAR DAVID: If you are now on the title alone, you can sign a quitclaim deed to your mother. However, you will still remain liable to make sure the mortgage payments are made even when you don't hold title to the property. When your mother dies, the title to the house then goes to whomever she names in her will or revocable living trust.

You don't need to go through a title company to quitclaim your title to your mother. Consult a lawyer for details.

DEAR BOB: Our next-door neighbor is about 65 and retired. He is divorced and lives alone in his house. In 1995, he and his then-wife bought the house for $220,000. Today, it is worth about $650,000. The ex-wife is asking that he now sell the house and pay off its $187,000 mortgage to get her name off the mortgage so she can receive her half of the profit. He doesn't want to sell the house and move. He is a wonderful neighbor, and my wife and I trust him completely. We are willing to use our liquid assets to help him stay in his house. We are thinking of buying the house from him for cash and then selling the house back to him. Or perhaps we can loan him the money to pay off the mortgage and buy out his wife's share, with him getting a home equity line of credit to pay us back. -- Ashley S.

DEAR ASHLEY: If your neighbor can qualify to get a home equity line of credit for the amount needed to buy out his ex-wife and pay off the existing mortgage, let him do it on his own. There's no sense in you getting involved in a potentially messy situation. If he can't qualify for a new mortgage, perhaps you can buy the house and rent it back to him. That would give you the rental property tax benefits, and he and his ex-wife can each claim their $250,000 principal residence sale tax exemption up to $500,000 total. For more details, consult a tax adviser.

DEAR BOB: I recently attended a motivational real estate conference at a fancy hotel with a free lunch and a well-known ex-NFL quarterback as the special guest. The speaker claims investing in tax lien certificates will return a yield of 16 to 36 percent from counties across the United States. The price for his seminar package is $4,285, but he offered it at a discount price of $2,495. I smelled a shark so I didn't jump in the water, but many people bought the seminar. Are tax lien certificates really this lucrative? -- Ken Y.

DEAR KEN: Congratulations for not spending the $2,495 for that tax lien course. Tax lien certificates can be profitable investments, but you've got to know what you're doing if you want to avoid losing money. An excellent book on this topic is "Profit by Investing in Tax Liens" by Larry B. Loftis (Kaplan Publishing, 2004). And it costs less than $20.

DEAR BOB: My husband and I are in our seventies and have lived in our home for 48 years. Our three children are in their forties. Our will stipulates the house will go to the three upon our death. However, because one unmarried daughter living at home has been on disability for the past 25 years, we wonder if that is a good idea. If her brother and sister want their financial share of the house, the disabled daughter would not have the money to buy their shares. Nor would she have a place to live. We want to show compassion and yet be fair. Our children are kind, sincere and loving of each other. Wanting their share of the money would be based on need, not greed. What should we do? -- Mary Jane T.

DEAR MARY JANE: That is a difficult situation with no right or wrong answer. If I were in your circumstance, I would probably leave the house to the disabled daughter alone. Or you could leave it to all three siblings equally, but with a life estate in the house for your daughter as long as she lives in it. Either way, your disabled daughter will have a place to live. I presume the house is mortgage free so making mortgage payments is not an issue.

DEAR BOB: I have heard that some people can have a custom home constructed by a builder and, after construction is completed, have 50 to 60 percent equity in the new house. Is this true, and how can I go about doing this? -- Greg H.

DEAR GREG: Hire a quality custom-home builder who charges low construction prices. If you already own a building lot, that gives you a head start. There is no guaranteed way to turn a fast profit on new custom homes unless you can lock in a low construction price and market values rise during the construction period.

DEAR BOB: How does a reverse mortgage work? Who owns the home -- the person buying out the mortgage or the homeowner? -- David P.

DEAR DAVID: If all owners of a principal residence are 62 or older, and there is no or a small existing mortgage balance, the reverse mortgage lender pays the senior citizen homeowner either monthly lifetime income, a lump sum or a credit line (except in Texas). It's the homeowner's choice which alternative or combination is preferred.

The homeowner continues to own the home, subject to the reverse mortgage, which does not require any repayment until the homeowner sells the residence, moves out for longer than 12 months or dies.

Then the reverse mortgage matures and must be paid off, including principal and accrued interest. The remaining equity goes to the homeowner or the heirs.

Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page,http://www.bobbruss.com.

2006Inman News Service