DEAR BOB: I was intrigued with your answer a few weeks ago about how a home loan borrower can save thousands of dollars by "jumping ahead" on his mortgage payment amortization schedule. As you suggested, I asked my mortgage lender for an amortization schedule and was told, in effect, "Get lost, pal." I took out my loan in June 1987 for $98,500 at 10 1/4 percent fixed interest for 30 years with the monthly payment of $882.66. Please explain how I can "jump ahead" with this loan. -- Alfred P. DEAR ALFRED: I ran off a copy of your 30-year mortgage loan amortization schedule in less than a minute on my Macintosh computer. I'm surprised your lender refused to give you a copy, but I'm sending you this one.
As you will see, your first $882.66 payment in July was divided to $841.35 interest and just $41.31 principal. The August payment went $841.00 for interest and $41.66 for principal. The September payment includes $840.65 for interest and $42.01 for principal, and so on with slightly increasing amounts for principal each month.
To cut your loan's life to 15 years, and save thousands of dollars in interest, all you need do is increase each monthly payment by the amount of the next month's principal payment. To illustrate, in September send the lender the regular $882.66 payment for September plus the October principal payment of $42.37. That means you saved the October interest payment of $840.29 which never has to be paid. In October you therefore "jump ahead" on the payment schedule to what would have been the November scheduled payment by paying the $882.66 regular payment plus the December principal amount of $43.10, thus saving interest for the December payment.
In November you pay the regular $882.66, which would have been January's payment, plus the February principal payment of $43.84. Your December payment will be the payment which would normally have been the one due for March, plus the April principal payment. I think you get the idea.
The only drawback of this plan is your monthly extra principal payment increases slightly each month. However, your income will probably increase over the next few years so you should be able to afford the extra principal payments. But the key is to get a copy of your monthly loan amortization schedule so you can check off each payment and make an extra principal payment each month. DEAR BOB: What is the best way to avoid taxes on a home owned by a parent? My mother-in-law owns her house free and clear of any mortgage. She is 76. If she were to sell now, the capital gain tax on up to $125,000 of profit would be waived. But when she dies, will I have to pay not only the inheritance taxes but the capital gains tax also? What do you recommend doing now to minimize both of these taxes? -- Greg W. DEAR GREG: Nothing. If you and your wife receive your mother-in-law's house by inheritance when she dies, under current tax law there is no federal capital gains tax. However, if your mother-in-law leaves a net estate over $600,000, there may be a federal estate tax due. If she lives in a state that levies inheritance tax, such tax also would have to be paid.
It is usually better to inherit property than for a person to sell or give property to the person who will inherit it upon the owner's death. To illustrate, suppose your mother-in-law's house is worth $200,000 and she paid $25,000 for it many years ago. If she gives the house to you and your wife now, you take over her low $25,000 basis. Should you sell, you would have a huge capital gain tax. Or if your mother-in-law sells the house for $200,000, subtracting her "over 55 rule" $125,000 exemption leaves a $50,000 taxable capital gain. But if you inherit the house, your basis would be the $200,000 market value on the day of your mother-in-law's death. No capital gain tax would be due if you then sell the house for $200,000. Ask your tax adviser to explain further.
P.S. The tax laws are subject to change at the whim of Congress. DEAR BOB: Those one-year home warranty policies may be good for major problems, but not for minor problems, since there is a $100 deductible clause. Our home seller paid $289 for such a policy, but it would have cost us $518 if I were not a handyman. The sink/dishwasher got disconnected and a plumber wanted $60 plus parts for repairs. The furnace was a mess; the repairman wanted $65 plus parts. The oven element was disconnected and the repair company wanted $50 plus $40 for a new element. The garbage disposal went out within two months; the company wanted $96 to replace it. The refrigerator gave out within nine months and cost $75 to repair. The dishwasher broke, but I fixed it for $16 instead of the $60 cost of a service call. We foolishly did not have the house inspected before purchase because the Realtor assured us everything was covered by the warranty policy. Please advise your readers to have their home inspected before purchase even if it has a one-year warranty policy and caution them to ask about the high deductible for each repair. -- Louis S. DEAR LOUIS: Thank you for sharing the pitfalls of one-year home warranty policies. I fully agree that most don't offer much protection. DEAR BOB: For the past year I've been trying to sell my condominium. It has been listed with several Realtors but no offers. Recently I saw in your column the letter from the home owner in Enid, Okla., whose mortgage lender refused to help him deed his former residence to the bank. That is my problem except my mortgage has been sold to the Federal National Mortgage Association (Fannie Mae). The mortgage company that originated my loan and has been collecting my payments refuses to help. Almost four months ago I quit making loan payments, but they still ignore my letters and phone calls. As the monthly loan payment is over $1,200 and the condo rents for far less, I can't afford the negative cash flow and want to give the lender a quit claim deed to get rid of this condo. Should the deed go to Fannie Mae or to the servicing lender? -- Mike P. DEAR MIKE: The nice folks at Fannie Mae are very disappointed that their servicing lender is not doing a good job. If you have given up on the condo since you haven't been able to find a buyer, Fannie Mae would much rather work with you than to incur the delays and expenses of foreclosure. They suggest you send a letter to the servicing lender explaining what you propose. Also send a copy to Bonnie O'Dell, public information manager, Fannie Mae, 3900 Wisconsin Ave. NW, Washington, D.C. 20016. Be sure to include your loan number and all pertinent information so she can make sure you receive first-class service.
Some borrowers may have similar problems with home loans owned by Freddie Mac (Federal Home Loan Mortgage Corp.). If a Freddie Mac servicing lender is not doing a good job, its procedure is to write to Freddie Mac's regional director of loan servicing. Be sure to include Freddie Mac's loan number (obtained from the servicer) and write to its regional offices in Arlington, Va., Atlanta, Chicago, Dallas or Los Angeles, whichever is closest to the loan servicer's main office.
I understand your frustration because several years ago I had a loan service problem on a loan owned by Freddie Mac loan where the loan servicer refused to drop my PMI (private mortgage insurance) although the loan-to-value ratio was only 49 percent. After getting the runaround and arguing for months with the loan servicer's nasty senior vice president, when I contacted Freddie Mac's excellent personnel they told the lender to shape up. My PMI was immediately cancelled. Let me know if you receive equally good service from Fannie Mae -- or if you don't.
Incidentally, most originating lenders notify their borrowers if their home loan has been sold in the secondary mortgage market. Some states require written notification. But borrowers who aren't sure who owns their loan need only ask and the lender must disclose the current loan ownership. DEAR BOB: At the closing when we bought our home, we had no problem taking over the VA assumable mortgage. We also were told that the attorney was writing to the insurance company to assign the fire insurance policy to us. Unfortunately, the day after we took title, the house had a severe fire caused by leaking gas ignited by an electrical spark. The insurance company paid off the $43,272 VA mortgage but refuses to pay us because, they claim, we are not their insured since they had not yet consented to assignment of the insurance policy. We hired an attorney. The case went to a pretrial settlement conference and the judge agreed that the insurance company has no obligation to pay us anything to rebuild the house. As the more than $40,000 we paid for the down payment was our life's savings, plus money borrowed at the credit union, we are devastated. Should we go to trial and hope the jury sees things our way? -- Dell W. DEAR DELL: Your situation shows why home buyers are usually better off buying a new homeowner's insurance policy for the home's replacement cost rather than taking an assignment of an existing fire insurance policy.
I believe the judge's opinion is correct. But your lawyer is in the best position to advise if a trial would be worthwhile. Incidentally, the attorney who wrote the assignment request letter may be liable for damages to you because he should have known you were uninsured until the insurer approved the policy assignment. DEAR BOB: On July 20 we closed the sale of a waterfront lot for $119,000 and are attempting to make a tax-deferred exchange for two rental condominiums. The funds are being held in an escrow account by our attorney. The condos are under construction, but the completion date is uncertain. If the units are not completed during the 180 days allowed for a Starker delayed tax-deferred exchange, what would be the outcome? We are both in our 60s and need to buy these condos to supplement our income, and it would be a hardship to pay the 28 percent capital gain tax. -- Renner L. DEAR RENNER: There is no provision in Internal Revenue Code Section 1031 for extension of the strict deadlines. I presume your attorney has properly documented the exchange and you have met the 45-day deadline for designating the property to be acquired in the tax-deferred exchange.
If the condos won't be finished within six months, IRC 1031 makes no provision for substituting other "like kind" property to meet the 180-day deadline. Ask your tax adviser to explain further. DEAR BOB: Almost six years ago we bought our home and a title insurance policy was issued. Three months ago we were contacted by the ex-husband of the woman from whom we bought the home. He claims his ex-spouse sold the house, of which he was half owner, without his permission and that his signature was forged. The title company agrees. They will pay off the mortgage, but they refuse to pay us anything. Their argument is that we didn't buy an "owner's title policy" and only a "lender's title policy" was purchased. Our lawyer says this man's claim to our house appears valid and it looks like we will lose the house. Is there anything we can do? -- Antonio H. DEAR ANTONIO: I'm sorry to report it appears the title insurer and your attorney are correct. The lender's title policy only protects the mortgage lender, whereas an owner's title policy would have protected your equity. The title insurance industry does a terrible job of explaining to property buyers these two types of title policies. If you lose the house, your recourse would be against the woman who somehow forged her ex-husband's signature. Ask your lawyer to explain further. DEAR BOB: Thank you for your article about two months ago listing 11 questions to ask a mortgage lender before applying for a home loan. My husband is an engineer so he approached our home loan refinancing in a very detailed manner. When I realized we could save thousands of dollars I got involved, too, by making phone calls to lenders and asking lots of questions. After compiling all the information, we narrowed our choice to two S&Ls and one mortgage broker. The mortgage broker quoted the best terms but, thanks to your suggested questions of "How long does it take to get loan approval; will you give us a written loan commitment; and may we have some real estate agent and borrower references?" we soon found out he was lying. But the loan agents for the two S&Ls were both very professional so we decided to apply for loans with both. And we were glad we did. One charged no "up front" loan application fee and the other charged $250 for the appraisal and credit report. Both delivered loan commitments within a week. However, the one with the best terms wanted more documentation on our income. When we told her "no" she approved our loan anyway and we got our money last week. We adopted the attitude "The customer is always right" and refused to be pushed around. Does everyone go through the same loan hassles we encountered? -- Maggie C. DEAR MAGGIE: No. As you discovered, some mortgage lenders test borrowers to see how far they can be pushed. The volume of new home loans is way down now, so lenders are quickly adapting to keep prospective borrowers happy. Many are easing up on tough loan requirements. The smart lenders have told their loan underwriters to quit asking for unnecessary information that antagonizes borrowers.
Borrowers who are not in a hurry to refinance their home loans can be very picky. But home buyers who have a deadline to meet find they have less time and can't tell an uncooperative lender to get lost.
That article I wrote several months listing the 11 questions to ask when applying for a home loan created lots of controversy among lenders. The biggest complaints came from slow lenders, who said it is impossible to approve a loan in less than a week. Those are the lenders the borrowers should avoid, since plenty of lenders approve conventional loans in just a few days, contingent upon a satisfactory appraisal.
But the most interesting response was from the president of a S&L who wrote to thank me. He had been wondering why his loan department's volume was dropping. Then he realized his firm didn't meet the standards suggested in my article, so he quickly ordered some changes to make his S&L more flexible and competitive. You might say he has adopted the attitude that "The customer is always right." DEAR BOB: I enjoyed your recent story about refinancing your home, in which two appraisers were $50,000 apart on the value of your residence. We have a similar problem and wonder what to do. The S&L that was recommended by the real estate agent who sold us our new home sent out an "in-house" appraiser who valued the house we are buying at $12,000 less than our purchase price. The real estate agent gave the appraiser sales prices of neighborhood homes like ours which have sold for even more than we paid. The problems seem to be that although we paid $225 for the appraisal the S&L won't give us a copy, that the appraiser won't talk to us or the real estate agent, and that we only have about two weeks left before the scheduled closing date. Although we can come up with the extra cash to make up for the low loan, what can we do about this bad appraisal? -- Ricardo H. DEAR RICARDO: Since you paid $225 for the appraisal, you have every right to either receive a copy of the appraisal or get your $225 refunded. Something is seriously wrong if you and the real estate agent can't get the problem resolved with the appraiser. I hate to bring this up, but perhaps the appraiser was told to appraise low and be uncooperative because the S&L doesn't want to make the loan.
If I were in your position, I would phone the S&L president, ask him to investigate and get back to you right away.
Real estate appraisals are estimates of market value. Homes are usually appraised on the basis of recent sales prices of similar nearby residences. But the appraiser must adjust value for the pros and cons of the home being appraised, as compared to the recently sold "comp" sales. Reappraisals are very common where the appraiser overlooked information or didn't have complete facts.
If the first appraisal can't be "adjusted," you should insist on a reappraisal at the S&L's expense by another, preferably independent, nonstaff appraiser. DEAR BOB: I have been following foreclosure properties and found a nice condo being sold by the foreclosing S&L. With a $4,500 cash down payment, I'm confident the condo can be rented to produce only a $125 monthly negative cash flow. Considering the tax benefits and appreciation, do you think I should buy? -- Vickie N. DEAR VICKIE: No, no, no. I've said many times before, condominiums are fine for owner occupancy but are not great investment properties because they usually don't appreciate much in value and usually don't rent for enough to pay the mortgage plus monthly fees. Single-family houses usually appreciate in value more rapidly and attract a better quality tenant.