Smart Money: 20% equity necessary to remove PMI from mortgage

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Bruce Williams is a national radio talk show host and syndicated columnist|ret||ret||tab|

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Dear Bruce: I just built a new home with a 30-year fixed mortgage at 6 percent. After I get a garage built, which I'm paying for out of my pocket, my equity should exceed 20 percent. Then I'm going to apply to remove the Private Mortgage Insurance. My friends say I should build the garage under the mortgage, but the way I see it, Private Mortgage Insurance has nothing to do with the mortgage. B.J., Dunker Town, Iowa|ret||ret||tab|

Dear B.J.: Private Mortgage Insurance is merely a hired gun, someone hired to co-make your loan. Ordinarily, if you have the 20 percent equity, it would have been wiser to put the money down and then borrow the money on a second mortgage, if need be, to build the garage. There can be a difference of opinion as to the value of the house, which is determined by an appraisal and very likely will be conservative. Until such time as the bank agrees that the 20 percent equity is secured, you will continue to pay the Private Mortgage Insurance premium. Plus you will also have paid an extra premium to put it into place. I would hope that you used an attorney for this transaction and that he advised you as I have. At this point, you will have spent money that is unnecessary, and all you can do is try to extricate yourself to eliminate the insurance. That will require yet another appraisal. Hopefully, the lender will agree that the equity is sufficient.|ret||ret||tab|

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Dear Bruce: I have lived in my home for almost 40 years. My house is valued at around $400,000. I have a small mortgage. The difficulty is the condo that I like in my area costs about $350,000. By the time I retire my mortgage, there is little left over. What do you suggest? D.B., via e-mail|ret||ret||tab|

Dear D.B.: The operative expression here is "that I like." You may want to continue with the space you have now, and I have no problem with that as long as you can afford it. If you wish to take out some of the capital of your home, you are going to have to scale back your space requirements, and even the neighborhood requirements. On the other hand, if you prefer to stay where you are, and you have indicated in your letter that you can currently manage, then why not? Homes are as much a lifestyle as they are an investment. |ret||ret||tab|

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Dear Bruce: My husband and I are 68 and 67, respectively. Nine years ago, we built a home on a lake. We have only $20,000 in savings, which is going quickly. We'd like to refinance our $210,000 balance for 30 years at a lower rate. Two of our children would like to pay off the mortgage and work out some kind of arrangement for when we die. We cannot exclude the other three children from our estate, but they cannot afford to participate. What would you suggest? We are in such a dilemma. E.S., Winconte, Wis.|ret||ret||tab|

Dear E.S.: Your first responsibility is to your husband and yourself. If two of your kids are in decent financial condition, they could pay off the mortgage then recapture their investment and a reasonable return on the house sale when you pass on. If you live long lives, it's possible that the entire estate would be dramatically reduced or completely consumed. So what? You are the beneficiary of your hard work. The two kids who helped out are reimbursed for whatever monies and interest lost in helping. Whatever remains can be divided five ways. The other possibility, although not one I would recommend at your ages, would be a reverse mortgage. You would have to pay off the property before a reverse mortgage could be issued.|ret||ret||tab|

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Dear Bruce: I bought a house in August 2000 with an adjustable rate mortgage at 7.4 percent the first year, 8.4 percent the second year and 9.4 percent there after. The 9.4 percent rate kicked in last September. I would like to refinance, but there is a possibility that we may be leaving the country in about nine months. Given the closing costs, up to $3,000, would it be worth doing if we wind up leaving in September? The bank gave us a quote of 6.5 percent for a 15-year mortgage, which is a good rate if we don't leave. C.R., via e-mail|ret||ret||tab|

Dear C.R.: First of all, I would like to know why you are paying 9.4 percent on a mortgage loan in a market where a sub 6 percent is more standard? I have to assume that there may have been some kind of credit glitch. You didn't tell me the amount of your mortgage, so I don't know what the savings would be to drop 3 percent for nine months. I think you are getting quoted a rather high rate for a 15-year mortgage, as well. I would shop around. The likelihood is that unless you have a huge mortgage, you will not recapture the cost of refinancing in eight or nine months. As soon as you know if you will be staying, I would refinance, but I would shop. I don't think your bank is the best place to be.|ret||ret||tab|

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Dear Bruce: I'm starting to invest in real estate, and I am looking for duplexes and triplexes to buy. What percentage of the purchase price should I receive in rents? Is there a formula to follow to know if the real estate is worth buying? A Realtor said to take the gross monthly income of the property, multiply it by eight and then by 12. Whatever number you come up with is the maximum one should pay. Do you agree? For example, if a property grosses $5,000 a month, that times eight, times 12 equals $480,000. If I can purchase a property at that price or below, is this a good deal? C.F., via e-mail|ret||ret||tab|

Dear C.F.: There is no magic formula, but the one that you cite approximates the 1 percent per month of the value of the property that I recommend. In your example, the 1 percent would indicate the value of $500,000, and your $480,000 is pretty close. I would rather find an investment that had an even higher percentage of return. It's true that they are not easy to find, but then this is not like purchasing loaves of bread. You only have to find one every few months to make the exercise worthwhile.|ret||ret||tab|

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Dear Bruce: I have the opportunity to purchase a vacation cabin about 4-1/2 hours from here. I have rented it myself. It's a two-story, three-bedroom, two-bath cabin on about five acres. The people who own it are friends of a friend. I would be the sole owner of the property and continue to use it as a vacation rental. My understanding is that it maintains consistent tenants throughout the year with a property manager. I have a full-time job, and I do not have any interest in managing the cabin. Would this be considered a timeshare? My understanding is it will be a joint ownership property in which the owners share time staying there. What do you think? K.D., Dayton, Ohio|ret||ret||tab|

Dear K.D.: Up until your last couple of comments it sounded like a "fee simple" or ownership deal. There are so many ways time-shares names can be disguised. I would have to know more. If it is a timeshare, I would run like crazy; I don't believe them to be a viable investment at all. I have written extensively on that topic, and it's my view that timeshares are a very sour proposition. Notice I didn't say investment, because I don't believe they are investments. They seldom can be resold if you want to get your money out. Long-range ownership is a tricky proposition at best. Until you get the exact details of this arrangement, I cannot help you further.|ret||ret||tab|

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Dear Bruce: My wife and I live in Southern California. I'm 45, and she is 49. Our annual income is approximately $38,000. We have a mortgage balance of $155,000 and recently took out a $45,000 home equity loan to pay off our car, truck and existing credit cards. Our house is worth $750,000. Our payments are $1,018 and the interest-only home equity loan payment is $200. We inherited some income property sold in 1983 on a trust deed, and we receive $1,600 a month interest and principal. The buyers decided to pay off the $149,000 balance. Is there anyway to shelter this from capital gains taxes, invest the balance or should we pay down our house mortgage? We've come to depend on the extra income to pay the mortgage, our fault. M.R., Southern Calif.|ret||ret||tab|

Dear M.R.: Your house has clearly appreciated enormously. A house that is worth approximately 20 times your combined annual income is somewhat out of proportion. By the way, your mortgage balance is $200,000. Your home equity loan is no different than the ordinary mortgage other than the interest-only deal that you have struck. The omission in the information you provided is the interest rates you pay on these monies and what you receive on the trust deed. The latter is pertinent because it may be that the individual who owes you the $149,000 might be amenable to retaining the debt if you offered a lower interest rate. The thrust of the question revolves around what interest rate could your $150,000 earn for you and what you pay to borrow the $200,000 on your current home. Unless you are prepared to take a degree of risk, the likelihood is that, even taking taxes into account, you're paying more for the money than it will earn. In that scenario, you would be better advised to pay off the mortgage. The deductibility of your interest is not a factor, given your relatively modest income. |ret||ret||tab|

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