QDEAR BOB: We have a 4.875 percent adjustable-rate loan, but another bank offers 4.25 percent "interest only." Is this a good or bad deal? -- Vincent P.
ADEAR VINCENT: Interest-only mortgages have become extremely popular with home buyers and homeowners seeking to minimize their payments. An interest-only loan is usually an adjustable-rate mortgage with the monthly payment locked in for a specified term, such as 12 months. After that, the payment adjusts, depending on its index plus a margin, like all ARMs.
There are pros and cons. If you expect to stay in your home less than five years, an interest-only mortgage keeps your monthly payments at fully tax-deductible rock bottom. You won't be paying down the principal balance but, if you will be selling in five years, who cares?
However, many interest-only mortgages have negative amortization. That means your interest-only payment remains fixed for the specified term, but the ARM interest rate adjusts monthly or semi-annually. Any unpaid interest is added to the principal balance. You could end up owing more than you borrowed.
A variation on interest-only mortgages is the option mortgage. That means the homeowner has the option of paying only the interest, or partially paying down or amortizing the balance, or fully amortizing the mortgage balance.
The option mortgage would be desirable if you expect to stay in the home many years but can barely afford the interest-only choice now. If you expect to earn more in a few years, you could later start amortizing the mortgage to pay down the balance.
DEAR BOB: I have been reducing my 15-year, 5 percent interest-rate mortgage by paying extra principal each month. My friend says I shouldn't do that because I won't save much and I am better off investing elsewhere, as I have 13 years left. -- Kevin L.
DEAR KEVIN: I think you are a smart investor. Every time you pay extra principal to reduce your mortgage balance, you just made an investment earning 5 percent. Ask your friend if he or she knows of a better, safer investment than building equity and saving 5 percent interest on your home mortgage.
DEAR BOB: My wife and I own a second house in Connecticut where our son, his wife and their children live rent-free. Last year, we added our son and daughter-in-law to the title. We are still on the title, and we pay the property taxes and mortgage payments. The state of Connecticut sent us a letter indicating we might owe gift tax. We thought since we are still on the title and pay the property taxes and mortgage, this is not a gift. Do we owe state gift tax? -- Robert N.
DEAR ROBERT: I am a lawyer in California but not in Connecticut, so I can give you only a general answer. If you gave away a specific interest in the property, such as 50 percent, you might owe a state gift tax. However, if you added your son and daughter-in-law as joint tenants with right of survivorship to avoid probate when you die, no gift tax is normally due because you might survive the donees.
However, the federal gift tax situation is clear. You and your wife can give away a total of $1 million during your lifetimes without owing federal gift tax. But gifts exceeding $11,000 per donor per donee per year require you to file a federal gift tax return even if no gift tax is due. Also, the total of your exempt lifetime gifts up to $1 million will be subtracted from your federal estate tax exemption, currently $1.5 million per person if you die in 2005.
Consult a tax adviser for details.
DEAR BOB: I want to refinance my mortgage. Is it safe to apply for a mortgage on the Internet? Are there any online mortgage companies I should be wary of, or should I just apply with someone in person? -- Eileen L.
DEAR EILEEN: Several years ago, when I wanted to refinance my home loan, I applied online with a major lender. The day after I filled out the application online, I received a call from one of the company's operators, who had no clue about the types of loans available and admitted she had no approval authority. I was disappointed, so I obtained my mortgage refinance from a local lender.
However, I had an excellent Internet experience with another big national lender when I obtained a home equity credit line on my second home. There were no surprises. They did a drive-by appraisal, didn't require income verification and couldn't have been nicer.
But many readers have complained about Internet lenders who promise: "We have lenders fighting for your mortgage." Some of those online lenders fail to deliver what they promise.
If you refinance with a local loan originator, such as a mortgage broker, mortgage banker or local bank, you know where to find them if there is a problem.
DEAR BOB: You said some realty agents underprice homes to make quick sales. I thought agents wanted to sell homes at the highest prices to maximize their sales commissions. We recently interviewed two agents about listing our home for sale. We listed it and sold it within three weeks for a price higher than either agent had suggested. You are right to advise interviewing several agents, but why would an agent underprice a home? -- Joan M.
DEAR JOAN: Most agents don't care if your home sells for $200,000 or $220,000. The sales commission, after it is split with the buyer's agent and the brokerage office, is about the same either way. What really matters to agents is control of the listing and selling the house before the listing expires, typically in 90 days.
There are three possible reasons an agent might price a home below its market value. One, the agent is out of touch and doesn't keep up on recent comparable home sales prices. Two, the agent wants a quick, easy sale and the seller has no clue as to the true market value. And three, the agent and seller agree to intentionally underprice the home to create a buyer frenzy. Unfortunately, this misleading tactic is legal and does not violate the Realtor association's code of ethics.
DEAR BOB: My son and his wife just moved into their new home. Their next-door neighbor told him the builder put the neighbor's driveway two or three feet onto my son's property. The builder says he would have to cut into the neighbor's property to make it right. The neighbor wants my son to give him the necessary footage. I think it's a problem with the builder, not with the neighbor. What recourse does my son have? -- Mae LeB.
DEAR MAE: Your son should not sign anything until he consults a real estate lawyer. His primary recourse is against the builder who created the driveway encroachment. Another recourse is against the title insurance company, if your son obtained an owner's title insurance policy. Then he has two "deep pockets" -- the builder and the title insurer.
This problem should be resolved now, because when your son and his wife eventually sell their home, a surveyor or the title insurer will discover the driveway encroachment. That could hurt their home's value and salability.
DEAR BOB: I own a rental home that cost me $57,000 in 1977. I depreciated it on a 20-year straight-line basis after I moved out in 1981. It is now worth $375,000. If I sell this property to acquire a more expensive property, I'll be back in debt. Is an Internal Revenue Code 1031 exchange the only way to sell and avoid tax? -- Terry S.
DEAR TERRY: Yes. If you want 100 percent tax deferral, an IRC 1031 tax-deferred exchange for another investment or business property of equal or greater price and equity is the way to go.
If you are tired of "tenants and toilets," an alternative is to make a tax-deferred trade into a management-free TIC (tenant in common) investment, such as a shopping center, office building or apartment building. Finding quality TICs isn't easy, but you won't owe any capital gain or recapture tax with such a trade.
Or you can kick the tenant out, move back into the house and live there at least 24 months as your principal residence. Then its sale can qualify for up to $250,000 tax-free profits ($500,000 if your spouse also moves in and you file a joint tax return in the year of the sale).
However, the depreciation you deducted would then be taxed at the special 25 percent federal "recapture" tax rate. Also, you would probably owe state tax. Consult a tax adviser for details.
DEAR BOB: You said the maximum federal capital gain tax is 15 percent. Does this apply to all types of capital gain? Is there any sales tax on the vacant land we sold? -- Lori G.
DEAR LORI: I am not aware of any state that imposes a retail sales tax on property sales. Capital gain tax refers to the tax on sales of long-term capital asset investments held more than 12 months, such as stocks, bonds and real estate. But state income tax rules vary widely on capital gain taxes, depending on where your vacant land is located. Consult a tax adviser for details.
DEAR BOB: My husband and I must sell our three-level villa (our second home for 15 years, never rented). We understand that our profit, minus capital improvements and real estate sales commission, carries a capital gain tax. Can you send us the tax law concerning second-home sales?
-- Beverly J.
DEAR BEVERLY: There is no tax law that applies specifically to sales of vacation or second homes. Your sale is a capital asset transaction, reportable on Schedule D of your federal income tax return. Consult a tax adviser for details.
DEAR BOB: I recently bought a house that was built in 2001. It looked as if it didn't have any problems, but the whole house needs painting and the roof leaks. The seller was never available to disclose any problems. What recourse do we have against the seller or the real estate agent? -- Cynthia O.
DEAR CYNTHIA: Just because a house is fairly new doesn't mean it is in good condition. Your realty agent should have recommended you include in your purchase offer a contingency clause for a professional home inspection. Perhaps the agent knew about the problems and didn't want to kill the sale.
Never rely on a home seller to tell you if the home has serious defects. After the sale closes and the seller has your money, you have zero leverage. But before the closing, you had 100 percent leverage.
At this point, all you can do is contact the agent and seller to discuss them paying for the repairs if you can prove they knew about the hidden defects. If you don't get a satisfactory response, your next step is to consult a local real estate lawyer about a lawsuit for breach of contract, fraud and misrepresentation damages.
DEAR BOB: I have about 13 years remaining on my 15-year, 5.75 percent interest rate, $180,000 mortgage. I also have an $80,000 home equity credit line, which adjusts with the prime rate, currently 0.25 percent below prime at 5.99 percent interest. With the prime rate rising, when should I convert my line of credit to a fixed-rate mortgage? -- Dave A.
DEAR DAVE: With fixed-rate loans hovering around 6 percent interest, this is an excellent time to consolidate your first mortgage and home equity line of credit. You may be able to lower your first-mortgage interest rate while stabilizing the interest rate on the home equity credit line.
DEAR BOB: I recently sold my home after owning it for 41 years. I went into active duty with the military in 1990 and had not returned to the home since then. My adult children lived in it rent-free. I was discharged from the military in 2001. Will I have to pay capital gain tax on the sale? What is the tax code for my situation? -- Thelma R.
DEAR THELMA: Internal Revenue Code 121(d)(9), known as the Military Family Tax Relief Act of 2003, applies to "members of uniformed services and foreign service" who sell their homes. It extends the required principal residence occupancy period needed to qualify for the $250,000 home-sale tax exemption to 10 years for people on active duty (rather than five years for civilians).
DEAR BOB: I recently sold my home and am trying to figure out if I owe any capital gain tax. My purchase price was $57,000; we added about $125,000 of improvements over the years. The net sales price was $642,000. The mortgage balance was $422,000. I figure my capital gain is $220,000 ($642,000 minus $422,000). But my friend says my capital gain is $642,000 minus my $182,000 basis, for a $460,000 capital gain, of which $250,000 is tax-free. Who is right?
-- Hamilton R.
DEAR HAMILTON: The mortgage balance is irrelevant; it exceeds your $182,000 adjusted cost basis ($57,000 plus $125,000 in capital improvements). This is called an "excess mortgage." To calculate your capital gain, take your $642,000 net sales price and subtract your $182,000 basis to arrive at a $460,000 capital gain.
However, there may be ways to reduce the gain. If you owned and occupied the home as your principal residence at least 24 of the 60 months before the sale, you qualify for the $250,000 home-sale tax exemption of Internal Revenue Code 121. Subtracting the $250,000 exemption from the $460,000 capital gain leaves a $210,000 taxable capital gain.
If you are married, if your spouse also meets the 24-of-the-last-60-months occupancy test and if you file a joint income-tax return in the year of sale, she can claim an additional $250,000 tax exemption under IRC 121.
Or, if you have a co-owner on the title who also meets the occupancy test, then he or she is entitled to a $250,000 principal residence sale tax exemption, making the sale tax-free.
DEAR BOB: I am a real estate agent, and I think agents need more time than the 90-day listings you recommend to sell most homes. In my market, the average number of days on the market for a house is 105. When sellers point to your articles where you say a 90-day listing is sufficient, I show them why I need more time. -- Curt R.
DEAR CURT: If you are an average agent in a community where the average house stays on the market for 105 days, you are correct than you probably can't sell a home in 90 days. But I don't recommend that my readers hire just average agents.
The biggest reason I recommend 90-day listings for home sellers is so they won't be stuck with a lazy agent for a long time, in case they chose a bad agent. I suggest you improve your sales skills so you become an above-average agent who sells listings in less than 90 days.
DEAR BOB: I have been a real estate agent for three months, mostly representing buyers. Several independent brokerages in our area refuse to share their listings. They don't put them into the local multiple listing service although they are members. They say their sellers want the listing firm to have an "office exclusive" for the first 30 days. This makes it tough on agents whose buyers ask about newspaper ads for houses where the listing agents won't cooperate. Isn't there a law requiring listing agents to cooperate? -- Ted W.
DEAR TED: No. If the seller is aware in the listing contract that the listing agent's firm will have an "office exclusive" for the first 30 days, there is nothing other agents can do to force such an agent to allow you to show those listings.
An exception could occur if the local multiple listing service required a member brokerage to place all listings into the service within 24 hours, but it's easy for a listing agent to get around such a rule.
Readers with questions should write Robert J. Bruss at 251 Park Rd., Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com.
(c) 2005, Inman News Service