How to Handle a Negative-Amortization Mortgage

Q: DEAR BOB: I have a negative-amortization mortgage on a new house in Naples, Fla., that is worth $140,000 less than when I bought it in January 2006. Should I stop making mortgage payments and allow a foreclosure to occur? I think that is my only choice. -- Susie T.

A: DEAR SUSIE: With that negative-amortization mortgage, the unpaid interest portion of each payment was added to your mortgage balance, so you owe more than you originally borrowed. Just because a property has lost market value after purchase doesn't mean its owner should walk away.

When you bought the property, you could afford the payments. That hasn't changed. Keep making the mortgage payments as you agreed to do. If you stop making payments, your credit will be ruined and you will lose a property in a highly desirable city.

DEAR BOB: My wife and I own our condominium mortgage-free. I would like to sell, but my wife has dementia and is unable to sign the condo listing and sales papers. I manage our affairs, but I do not have power of attorney for her. What would I need to do to sell our condominium? -- Terry P.

DEAR TERRY: If you had placed your major assets, such as your condo, stocks, bonds and bank accounts, into a revocable living trust when she was in good health, then you could sell the condo today as the trustee without the need for her signature now that she is incapacitated. Since you don't have a durable power of attorney from your wife or a revocable living trust, the only alternative is to have a court-appointed conservator represent her interests. To have a conservator appointed by the local probate court, you will need to hire a probate lawyer.

DEAR BOB: In May 2008, we will make the final payment on our 30-year mortgage. Is there any advice you can give us, considering that we will no longer have an escrow impound account for homeowner's insurance payments and property taxes? What should we expect when we make that final mortgage payment? -- Travis C.

DEAR TRAVIS: After you mail that final payment to the lender, contact the local property tax collector and your insurance agent to have the bills sent to you. Be sure the lender records either a satisfaction of mortgage or a deed of reconveyance. Some lenders automatically do this for their borrowers. Other lenders send the notarized document to the borrower and let the borrower record it. Either way, follow up to be certain this important document gets recorded so your property title will be clear of the mortgage.

DEAR BOB: My mom owns two condominiums. She has owned both about five years and has lived in one all that time. I rent the other condominium from her. If she sells these condos, can she use that $250,000 exemption to avoid capital gains tax? -- Andrea T.

DEAR ANDREA: Because your mother has owned and occupied her principal-residence condo for at least 24 of the past 60 months, she appears to be eligible for the Internal Revenue Code 121 capital gains tax exemption of up to $250,000. If she is married and her spouse also meets the principal-residence occupancy test, then that sale is eligible for an additional $250,000 exemption. However, your mother is not eligible for any special capital gains tax exemption on the condo you rent from her, as it is not her principal residence. Of course, she could move in for 24 months before selling it, thus making it eligible for the IRC 121 exemption. Or she can make an Internal Revenue Code 1031 tax-deferred exchange of that rental condo for another investment or trade or business property of equal or greater cost and equity.

DEAR BOB: I am buying a house and using a buyer's agent. He is asking me to pay a $245 application fee to his brokerage. This is on top of the 2.5 percent sales commission the firm will be paid by the home seller. Is this fair? Should I pay an application fee to a broker who is going to get more than $9,000 in sales commission? -- Kwame A.

DEAR KWAME: You should not pay a $245 "application fee" to your buyer agent's brokerage. A $9,000 sales commission, which you are indirectly paying, is enough. Real estate brokers should not charge their buyers extra fees. The sales commission, usually split equally between the listing agent and the selling agent, is sufficient. Unless you signed a buyer's agency contract agreeing to pay that fee, you are not required to pay. Tell the buyer's agent to pay that junk fee from his own pocket if his brokerage insists on charging it.

DEAR BOB: My brother bought a house with his girlfriend. They went to a subprime lender because of his credit problems and self-employment. But the loan officer, a rookie, arranged a mortgage in the girlfriend's name alone. After two years, they broke up and he moved out. In today's market, she can't sell the house for any reasonable price, so they took the house off the market. The problem is that they borrowed the $33,000 down payment from my mother. How can we protect mom's money when the house eventually sells? Can she record a quitclaim deed? Can interest be added? Will mom be able to get half the profits when the house eventually sells? -- Joseph D.