Home renovations should pay future dividends

Dear Bruce: I bought a house in August 2003 for $378,000 in Seattle. There are 1,200 square feet of livable space and 1,200 square feet of unfinished basement. I recently completed a full-scale remodel of the basement, including a new bedroom and bathroom. I’ve re-plumbed and rewired the entire house and put on a new roof. I bootstrapped all of these projects with cash, a home equity line of credit and some credit cards. Today, my total debt on the house is $394,000. I have additional debt of $29,000 from an auto loan, student loan and credit cards. I make too much money to see any tax benefit on the student loan. Because I now have a totally different real estate asset that recently appraised for $550,000, I think I should refinance my mortgage. If I do 80 percent of $550,000, I could arrive at a first mortgage of $440,000 and pay off all the other debt. I’d love to have a mortgage payment and no other debt. Am I on the right track? – B.E., Seattle

Dear B.E.: Congratulations on doing the improvements to your home. Over a period of time that should pay dividends, and in addition, you have a lot more living space. Let me observe that under ordinary circumstances I am not a fan of reducing credit card debt by borrowing on a long-term mortgage. However, you’ve indicated that the money was used for home improvements. Unfortunately, the possible solution that you’ve outlined is a tad simplistic. While it may make you feel warm and fuzzy to consolidate your loans, it may not be the most cost-effective. The first major thing to consider is the effect on the bulk of your debt, the original mortgage. If you can get a better rate now, that in itself would be sufficient reason to refinance. You should consider the interest rate that you’re paying on the credit cards, the home equity line of credit that is very likely a higher rate than your primary mortgage, the automobile loan, etc. These things have to be separated out. It might pay, for example, to keep the student loan because of the very low rates but refinance the automobile. The problem with the automobile once it’s a long-term purchase is that it loses value daily. You might be paying off a car for 30 years. Not too smart. I am confident that you can separate these things out and take each piece of debt as a separate item.

Dear Bruce: We bought a double-wide mobile home three years ago. To this date we have been breathing and living with cellulose blowing into our home. No one knows where it is coming from. We had HUD, the manufacturer, the dealer and the furnace manufacturer in, and no one has an answer. It also seems that no one really cares. We can sweep twice a day and dust and still get a handful. It is destroying my furniture, plants, etc. We had it analyzed ourselves and were told it was 60 percent cellulose, 5 percent hair, 10 percent fibrous glass and 25 percent nonfibrous. The floors are warped, the walls and siding are bowing, but no one will help us. To get local help will cost a fortune because we would need to hire an engineer to see if the mobile home is level, if the footers are below frost level, etc. I am on partial disability and my husband has heart problems. With all of our health problems breathing this stuff worries us. Any advice would be deeply appreciated. – Ruth, via e-mail

Dear Ruth: The complex problems that you are having with your mobile home, which I assume you purchased new, will have to be addressed legally. But more importantly, there very likely are health concerns. If your physician determines that your health has been adversely affected by all of the problems that you have outlined, I think it would be very possible that an attorney would take the matter on a contingency basis. It’s hard to imagine that the dealer and the various manufacturers do not have a legal responsibility. While I can understand being intimidated by the problem, the issues here will have to be sorted out legally. This will require an attorney.

Dear Bruce: How do we find a broker to help us find a home in a new area in a different state? What research tools are available on the Web to assist in selecting a new neighborhood? Do you recommend renting a home before buying to get to know the area? – L.H., via e-mail

Dear L.H.: You can find a broker very easily by using one of the national companies that have offices in other communities. You can consult the phone book where they list many of these. There is any number of Web sites where you also can find a broker in the area of choice. You can just type in “homes for sale,” including the city that you are moving to, into a search engine, and it will pull up all the brokers in that area with homes listed in your price range. And on most of the Web sites, you can look at pictures of the house.

Whether to rent a home in the area you are moving to is the most important question that you asked. Renting until you get to know the neighborhood, shopping, traffic – all the many subtleties you would not get during a quick visit – is important. Many a person has purchased a home in haste and regretted in leisure. The rental market today is a great bargain, although you might observe that as property goes up you might miss some of that appreciation. That sacrifice in my view is more than offset by knowing the area you are buying in before you buy.

Dear Bruce: My son resides in Reno, Nev., and owns a three-acre building site. He has owned this property for 10 years. This past year, he subdivided this site into two building lots and proceeded to sell one lot. His certified pubic accountant advised him that he would be charged with “short-term” capital gain, since he divided it so recently, and it would take at least two years to avoid the high tax rate. I asked my tax adviser what he thought, and he doesn’t agree. What do you say? – P.H., Sioux City, Iowa

Dear P.H.: I am on your tax adviser’s side. The fact that it was subdivided, while it might have changed the value, doesn’t alter the fact that he has owned the property for 10 years, which would make this a long-term capital gain. I see no reason the short-term rule would apply, but once again, logic and the Internal Revenue Service code could get married because they surely are not related to one another.

Bruce Williams is a national radio talk show host and syndicated columnist.