It's All in the Clause

DEAR BOB: In a recent column, you said, "Now you know why I never recommend negative-amortization ARMs." Does that mean you changed your advice? I recall that many of your columns recommended the COFI (cost of funds index) adjustable-rate mortgages, which have negative amortization. -- Tom C.

DEAR TOM: ARMs that use the COFI do not always have negative amortization where the borrower's monthly payment increases more slowly than the interest index increases. The result can be that the unpaid interest is added to the mortgage balance, thus creating negative amortization.

I have never recommended negative-amortization ARMs. I have had several COFI adjustable-rate mortgages that didn't have negative amortization.

The key question to ask is how often the ARM monthly payment and the index change. If the index rate can change faster than the borrower's monthly payment changes, negative amortization can result.

Negative-amortization ARMs can be a very bad deal, especially when the home buyer made a low- or zero-cash down payment.

DEAR BOB: I read in your column that two principal-residence co-owners (who are not spouses) can each qualify for up to $250,000 of tax-free sales profits under Internal Revenue Code 121. Can three owners of one house qualify? Would $250,000 be available to each co-owner, or is $500,000 the maximum exemption per home sale? Is there any limit to the number of co-owners who can qualify for this tax exemption? -- John S.

DEAR JOHN: There is no limit in Internal Revenue Code 121 to the number of $250,000 principal-residence-sale exemptions if each co-owner qualifies.

However, when the co-owners are not husband and wife, then all their names must be on the title at least 24 of the 60 months before the sale, and the property must be the principal residence of each owner for the required 24 of the last 60 months before sale.

An example would be three sisters who own and occupy their principal residence for the required minimum time before selling, thus qualifying for up to $750,000 in tax-free sales profits.

DEAR BOB: I am way over 65 and live in a condo that is worth around $300,000. The life expectancy of males in my family is only 50 years. I am considering a senior citizen reverse mortgage, or I might sell my condo and invest the sales proceeds. Which option do you feel is best for me? -- Wally D.

DEAR WALLY: If you are in reasonably good health for your age and expect to remain in your home for at least five years, I suggest you seriously consider a reverse mortgage.

The reason you should plan to stay in your home at least five years is to amortize the reverse mortgage's upfront fees.

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.

Copyright 2007, Inman News Service