DEAR BOB: I know you suggest making as small a down payment as possible when buying a home. But I'm worried that if we buy a home with a big mortgage, and my husband loses his job, we might lose our home. As we've got almost $14,000 in savings and U.S. Bonds for a down payment, don't you think we should make as big a down payment as possible? Or should we wait to buy until mortgage interest rates come down? Stephanie R.., Alexandria, Va.
DEAR STEPHANIE: Don't wait to buy a home. Mortgage interest rates aren't likely to decline soon, especially since savings associations will be raising interest rates on passbook savings accounts again next January. Costs of new and used home are expected to continue going up with no end in sight. Everything points toward high interest and home purchase costs.
As for your mortage, get the biggest one possible. Your realty agent can show you how to buy for a 10 percent down payment, sometimes less. Reasons for making a low down payment include (1) repayment is cheaper, inflated dollars worth less than today, (2) maximum income tax deductions for mortgage interest, (3) keeping cash available for emergencies and other investments, and (4) at resale time, maximum profit per dollar invested.
If your husband should lose his job and can't find another, you could probably sell the home at a slight profit before the lender forecloses. The longer you own the home before resale, and the smaller your cash investment, the greater your profit percentage per dollar invested. This is called leverage. It's another reason for buying your home with the smallest cash investment possible.
DEAR BOB: In a few months we will be selling our home. We must get the top price possible, in cash as we have many overdue bills which must be paid. A friend suggested we hold an auction to get many people bidding to buy our home. What do you think of this idea? Jennie M., Laurel, Md.
DEAR JENNIE: Not much. Auctions cheapen a home. People who bid at auctions are bargain-hunters.Since few people have enough cash to bid on your home, your potential number of bidders may be limited to the 40 thieves and a few others who have cash available.
While there have been some successful residential auctions, especially of condo complexes which didn't sell, the key to success is having mortgage financing easily available for the bidders. Financing should be arranged before the auction so if the buyer's credit and income qualifies, the lender standing by would loan a definite amount. But if you're selling just one house, it will be hard to get such a lender's commitment in advance.
You'd be better off listing your home for sale now with your area's best real estate agent. By giving yourself plenty of time to sell, you'll be able to negotiate a satisfactory sale that's good for you and the buyer.
DEAR BOB: When we bought our home last month we had to pay $746 in mortgage interest at the closing. This was to cover the time period until our first monthly mortgage payment is due. Is this tax deductible? A friend says prepaid interest is not tax deductible. Ellis R., Bethesda, Md.
DEAR ELLIS: Your friend is correct. But there is an exception for mortgage interest prepaid at the closing settlement if the interest covers the time until the first mortgage payment is due. Your tax advisor has details.
DEAR BOB: We recently sold our home and won't own any profit tax since our profit was less than $100,000 and we qualify for that "over 55 rule" you often write about. Do we have to tell the IRS about the sale? Margo M., Fairfax, Va.
DEAR MARGO: Yes. File IRS Form 2119 with your 1979 tax returns. Your tax advisor has further information.