QDEAR BOB: I own a townhouse condo that I bought in 1993 with a 6.5 percent interest rate on a 30-year FHA mortgage. My monthly FHA mortgage insurance fee is $47 and my purchase price was $130,000. Today, the condo is worth about $380,000. I have never seriously considered refinancing, although my lender periodically sends me advertisements about no closing cost refinances for 15 or 30 years. The interest rate would be slightly lower than my current interest rate for 15 years with a slightly higher monthly payment, but I would avoid that unnecessary $47 FHA fee. One of the reasons I am holding back is because I would be paying less interest, thus having less to deduct on my income tax. However, I would be taking about five years off the mortgage. Is such a refinance a good idea? -- Susan P.
ADEAR SUSAN: It makes no financial sense to pay higher mortgage interest just to get the itemized homeowner's interest tax deduction. To illustrate, if you are in the 28 percent federal income tax bracket, plus state taxes, for every $100 mortgage interest you pay, you get a $28 income tax saving. Wouldn't it be better to slightly reduce your interest rate, get rid of that $47 non-deductible FHA insurance fee, and shorten the mortgage term? I think you know the answer. It's a no-brainer.
DEAR BOB: I am a retired real estate agent who began his career in 1946. Recently, you wrote about "interest-only mortgages." When I started selling homes, interest-only mortgages were strongly blamed for the many realty foreclosures during the Great Depression. The problem then was the value of the security often fell below the mortgage balance. That's why the FHA was created to provide monthly-amortized mortgages to slowly reduce mortgage balances. Do you think American borrowers and lenders are setting themselves up for a financial foreclosure debacle? -- Guy C.
DEAR GUY: Most of today's "interest-only" home mortgages, often called "option mortgages," give borrowers the choice of paying interest only, fully amortized, partially amortized and even negative amortization (less than interest only, with the unpaid interest added to the principal balance).
But after the first 10 years, most of these mortgages are "recast" and become fully amortizing for 20 years. More likely, the borrower will sell the home and pay off the mortgage.
Interest-only mortgages allow first-time home buyers to get started building home equity. They are also ideal for home buyers who expect to stay in their homes less than 10 years.
As a real estate investor, I love interest-only mortgages because the monthly payment is rock bottom and the payment is fully tax-deductible as interest expense.
I hope today's versions of interest-only mortgages won't have the same sad result that occurred during the Great Depression. Home mortgage money is much more abundant today than it was then. Also, Fannie Mae and Freddie Mac create secondary mortgage market liquidity that was not available in the 1930s. Frankly, I'm not worried.
DEAR BOB: When my husband was diagnosed with Alzheimer's disease I sought estate planning. The lawyer changed our house title from joint tenancy with a quit claim deeding the house to my name alone to avoid possible problems if my husband had to go to a nursing home. Although he became severely disabled, he stayed at home with me until he died in July 2003. A friend told me I should have something done because I will not get a stepped-up basis if I decide to sell the house. We paid $59,000 in 1976 and today the house is worth about $600,000. Did we make a big mistake? Can the title transfer be undone? -- Irene D.
DEAR IRENE: You didn't receive a stepped-up basis when your husband died because you didn't receive any property interest from him at that time. Lifetime marital transfers between spouses, although tax-free, do not create stepped-up basis.
I am not aware how the recorded title transfer to you several years ago can be undone so that you could receive your late husband's share of the house by inheritance to get a new stepped-up basis to market value as of the date he died.
If you decide to sell the house, your adjusted cost basis will be the $59,000 purchase price, plus capital improvements added during ownership. Of course, you will have the $250,000 single tax exemption allowed by Internal Revenue Code 121, presuming you own and occupy your principal residence 24 of the 60 months before its sale.
DEAR BOB: My brother died and left a living trust and a will. His trust named me trustee of his estate and assets. No probate was needed to distribute the living trust property. However, the living trust did not refer to 10 acres of vacant land he owned in California. My lawyer advises not to try selling the land because probate court expenses will be high. Being the only living family member and 88 years old, my brother's will names me to receive any remaining assets, such as the land. Can I sell the 10 acres without probate? I sure could use the money from the sale -- Felix McC.
DEAR FELIX: Now you understand why I constantly advise real estate owners to include all their real estate in their living trusts to avoid probate. Your brother apparently forgot to deed his land into his living trust, thus causing you needless costs and delays.
Although there is apparently only the land asset, which is subject to your brother's will, a probate proceeding must be opened so the will can be presented to the court and the land title transferred to you according to the terms of the will. Just because you are the only heir doesn't entitle you to transfer title without probate court approval.
However, in many jurisdictions, there are informal probate procedures where the asset value subject to the will is small. I suggest you hire a probate lawyer in the county where the land is.
DEAR BOB: We are not married, but we are building a house as our primary residence where we will be living together for two years or more. Is it necessary to be married to qualify for the $500,000 home sales tax exemption, or could we form a partnership? -- Joseph K.
DEAR JOSEPH: When two or more unmarried people share the same primary residence, Internal Revenue Code 121 allows each co-owner up to $250,000 tax-free capital gains upon sale. For each of you to qualify, both names must be on the title and you must each own and occupy the principal residence at least 24 of the 60 months before its sale.
DEAR BOB: I rent a studio condo from an owner who owns several units in my building. I would like to buy the condo where I reside, but financing might be difficult. Would it be possible to have the seller finance my purchase? If so, how do I go about setting this up to our mutual advantage? -- Patrick R.
DEAR PATRICK: If your seller owns the studio condo free and clear with no mortgage, a seller-financed mortgage, called an "installment sale," would be a "good deal" for both you and the seller.
You and the seller should sign a written sales contract, specifying the sales price, your cash down payment, and the amount and terms of the mortgage the seller will carry back for you. The buyer usually includes in the purchase offer the mortgage amount, interest rate, monthly payment, and term. If that's not acceptable to the seller, then the seller can counter offer.
The seller's security is a recorded mortgage or deed of trust against your condo title. Sellers get to spread out their capital gains tax over the years they receive payments from you. But the tax-deductible interest you pay is taxable as ordinary income to the seller.
Older sellers especially enjoy seller financing because it gives them steady retirement income without worry about "tenants and toilets."
If you default, the seller can foreclose and either gets paid in full at the foreclosure sale or gets the title back to resell for a second profit.
DEAR BOB: I have two payments left on my mortgage, but I am worried. My homeowner's insurance and property taxes have up to now been included in my monthly payments. I need to know how I can protect myself when I receive official ownership of my home. When I called the lender, I was told I would be notified of exact final payment amount and I would receive a paid-in-full letter within 15 days after my last payment, but it will take 90 days for a new deed to arrive. After my mortgage is paid off, how will I pay the insurance and property taxes?
-- Rosalie B.
DEAR ROSALIE: Congratulations on reaching the final payments on your home mortgage. There's nothing to be scared about. Just continue making your two last payments on time. As you were told, your final payment may be slightly different to adjust for the fees of paying off the mortgage.
Be sure to ask your lender to promptly mail you a check for the balance in your escrow impound account for the homeowner's insurance and property taxes. That's your money. After your mortgage is paid off, you will get to pay those bills directly to your insurance company and the local property tax collector.
Although mortgage lenders are supposed to promptly clear a paid-off mortgage or deed of trust from your home's title, some lenders are slow to do this. After 90 days, be sure to follow up and be certain you received evidence the lender recorded either a deed of reconveyance or a mortgage satisfaction. You will then own your home free and clear.
DEAR BOB: My elderly friend and I are on the deed to her house as joint tenants with right of survivorship. Her will, which names me as her personal representative, leaves all her real property, including the house and contents, to be divided equally among myself and two other people. She is a widow and her only son is deceased. Is this sufficient?
-- Pat S.
DEAR PAT: No. Your friend's will has no effect on the house, which is titled in joint tenancy with right of survivorship. If your friend dies before you do, you will receive the full title to the house as the surviving joint tenant but not under the will. If you die first, then your friend owns the house by survivorship. The two other people named in your friend's will won't receive any interest in that house.
DEAR BOB: If we get a senior citizen reverse mortgage on our home and decide to move in a few years, can we move the reverse mortgage to our new home? I am 73 and my wife is 69, both in good health. Who do you recommend we contact for local reverse mortgage information? -- Donald S.
DEAR DONALD: Senior citizen reverse mortgages are not movable. Because of the substantial up-front costs, I suggest you don't obtain a reverse mortgage unless you plan to stay in your current home at least five years.
When you decide to sell your home, its reverse mortgage must be paid off from the sales proceeds. Then you could get another reverse mortgage on your next house or condo.
The best place to find local reverse mortgage representatives is on the Internet at www.reversemortgage.org where you will find local state-by-state agent listings.
DEAR BOB: I am not yet 62 so I am not eligible for a senior citizen reverse mortgage. Is there any alternative to help me with my money problems? My house is free and clear, worth approximately $365,000 -- Carol P.
DEAR CAROL: There is no other mortgage program of which I am aware that does not require monthly repayments to the lender. If you have adequate income, you might consider a home equity credit line, which costs nothing until you use it.
For example, suppose you need to pay off credit cards and put a new roof on your house. A home equity credit line will be ideal. Most banks and other lenders should easily approve a home equity credit line for 50 to 75 percent of your home's market value if you have decent income and credit.
When you become 62 (or later) you could then obtain a reverse mortgage to pay off the home equity credit line and be free of monthly payments as long as you stay in your home.
DEAR BOB: I want to thank you for recommending, several years ago, that condominium-building owners restrict the percentage of renters. That's what our homeowner's association did about two years ago. We changed our rules to prohibit additional rentals, although existing rentals were grandfathered in. At that time we had about 30 percent rental occupancy and the building was poorly managed. Gradually, we got our renter percentage down to about 10 percent. The results have been amazing: to have owner-occupants who care about properly maintaining the property. Also, our building is more attractive to condo buyers and their realty agents so prices are rising nicely. -- Everett H.
DEAR EVERETT: It's good to hear the results of limiting rentals in your condo complex. The big problem of having more than 20 or 25 percent rentals is many mortgage lenders either refuse to make new loans or they charge higher interest rates.
The reason is the default rate on mortgages in condo complexes with a high percentage of renters is greater than where most of the units are owner-occupied. Also, condo owner-occupants usually have greater "pride of ownership" and take better care of the facilities than do absentee landlords.
DEAR BOB: You recently suggested homeowners carry $300,000 liability coverage, plus a $2 million or $3 million umbrella liability insurance policy. This seems high to me. My homeowner's insurance policy currently has $100,000 liability coverage and I don't have any umbrella liability insurance policy. Do you think I need more liability coverage?
-- Martha W.
DEAR MARTHA: The answer depends on your assets, your home equity, and your potential liability risk. Accidents happen no matter how careful you might be. I won't bore you with all the possible negligence liability that might cause injury to others around your home.
If someone is severely injured, and if you are liable, your current $100,000 liability isn't much coverage if you get sued. Adding an extra $100,000 or $200,000 liability coverage on your homeowner's insurance policy shouldn't cost much.
More important, if you are wealthy and have substantial assets, a $2 or $3 million umbrella insurance policy is cheap protection. It also offers additional insurance coverage, such as for your negligence in an auto accident. Consult your insurance agent for details.
DEAR BOB: Several years ago, upon the advice of our lawyer, we added our four children to the title to our home and adjoining land. After reading your frequent advice that it is usually best to inherit real estate via a living trust to get the stepped-up basis on the date of death, we're wondering if we did the right thing. Why do you say it is better to inherit real estate than to receive it as a gift before death? -- Betty and Ernie G.
DEAR BETTY AND ERNIE: I hate to disagree with a fellow attorney, but depending on how title is held with your four children there might not be any stepped-up basis benefits.
Also, holding title with six people is almost certain to lead to eventual problems if you want to sell but one of the co-owners refuses to sell. Or what will you do if one of the co-owners becomes incapacitated, such as with a severe stroke or Alzheimer's disease?
Holding title to your property in your living trust would have been so much easier and your heirs would get the stepped-up basis benefits. A living trust lets you maintain control. By gifting part of your title to your children, you gave up full control. Consult a lawyer for details.
DEAR BOB: Have you ever heard of a tenant's security deposit being put into a one-year bank certificate of deposit? As a landlord, I want to be sure I have the tenant's security deposit available at the time the lease expires. I do not want the extra interest income and would give it to the tenant upon move-out. -- Betty B.
DEAR BETTY: I have not heard of placing a tenant's refundable security deposits in one-year bank CD. But some states and cities have laws requiring tenant security deposits to be placed in bank accounts that are separate from the landlord's funds.
There could be potential problems placing tenant security deposits into a 12-month bank CD. For example, suppose you allow the tenant to move out early. Most banks charge a penalty for early withdrawal of CD funds.
Or, if you put the CD in the tenant's name, then you have no control over it and could not deduct damages or unpaid rent from it. If the CD is in your name, then the interest would be taxable to you.
In summary, I don't see any advantages to placing tenant security deposits into a 12-month bank CD. Instead, most banks offer special trust accounts for security deposits; they usually pay a modest rate of interest.
DEAR BOB: I am a real estate agent with an ethics question. The seller of a home that had been on the market for 65 days dropped his asking price to $65,000. My buyer offered the new full asking price. The seller counteroffered at $18,000 above his reduced asking price. When I informed the listing agent his seller might be obligated to pay me a real estate commission and he was using "bait and switch" tactics, which I believe is an ethics violation, his seller chose to accept my buyer's offer. Do you think this was a bait and switch situation? -- Barb A.
DEAR BARB: As you probably know, some listing agents suggest to their home sellers the asking price be set abnormally low with the intent to create a frenzy of bidding that exceeds the low asking price.
I think such a strategy is dishonest and misleading to buyers. However, it is legal and doesn't violate the Realtor's so-called code of ethics.
As I've said here before, a home seller has no legal obligation to the buyer to accept an all-cash, no contingency purchase offer at the full listing price. The legal reason is the listing contract is between the home seller and the listing agent so the buyer is not a party to that contract and has no legal right to enforce it.
I question whether you, as the buyer's agent, had any legal right to demand part of the sales commission for producing a purchase offer at the new reduced asking price. The rules of the local MLS (multiple listing service) might provide the answer. In any event, your negotiation tactic worked to intimidate the seller into accepting your buyer's offer.
DEAR BOB: About a year ago, my husband filed Chapter 11 bankruptcy reorganization for his sole proprietorship business. He is paying all his creditors as agreed in the reorganization plan. We want to refinance our home mortgage that is at 7.75 percent interest, but we can't find any lender willing to refinance until he is discharged from bankruptcy in a few more years. Refinancing would solve our financial problems. Why can't we refinance? -- Ginger S.
DEAR GINGER: There is no law prohibiting you and your husband from refinancing your home mortgage. However, most mortgage lenders don't want to mess with your situation. The primary reason is refinancing would require the bankruptcy court approval. Most mortgage lenders require borrowers to be discharged from bankruptcy for at least 12 to 24 months.
Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page, www.bobbruss.com
(c) 2005, Inman News Service