Smart Money: Many factors affect decision to rent home

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

Dear Bruce: Should we rent or sell? We just put $20,000 and four years of our lives into renovating it, with my husband doing much of the work. It's a small home that's worth about $70,000. With everything in it brand-new, it shouldn't need much of our attention anytime soon. We are in our early 50s. Now that it is getting close to being ready for tenants, I don't know if renting is the right choice. The home we live in has a 15-year mortgage and we would not consider moving into the rental home. Can you tell us what we should be considering as the basis of our decision? D.H., via e-mail

Dear D.H.: Being a landlord is a very personal choice. You realize that it's a part-time job and your responsibilities will continue. You haven't indicated how much it would generate in rent.

If it will generate somewhere between $750 and $1,000 a month, it's likely a decent investment for you. If, on the other hand, it will only generate $400 or $500 a month, the likelihood is you would be better off to sell. You also haven't indicated whether you own it outright or whether there is a mortgage and, if so, how much at what percent. Another variable is whether the neighborhood is stable.

Many factors enter into this decision that deserve your attention, otherwise, the results could be disastrous.

Dear Bruce: My wife and I are looking to buy our first home. We would like some unbiased information on home mortgage loans. I think we have ruled out adjustable rate mortgages, because of the current low interest rates and we may be in this property for some time. We will likely go with a 30-year fixed.

We are particularly interested in bank loans versus using a mortgage broker. Information would be appreciated. Reader, Glenwood Springs, Colo.

Dear Reader: You and your wife are correct that adjustable rate mortgages are perfectly acceptable for short-term deals, but with the current low interest rates it would be well to lock a low rate in. The slight savings on a 15-year or 30-year mortgage is another matter.

Money is a commodity like any other and it pays to shop for it. I'm sure you shopped diligently for the home. By all means, check with two or three banks in your area. You will find that the rates will vary slightly from bank to bank. Mortgage brokers simply go out and search the marketplace to find the lowest possible rate, though it's not always at the lowest cost. There may be fees from either the bank or broker placement points, a fee for a credit check, survey, etc. which can vary from lender to lender. One of the most important parts of this transaction is to be represented by counsel. That doesn't mean an escrow company; it means hiring an attorney representing only you. So many people will say, "I don't need it, we used an escrow company."

This is the biggest ration of baloney that anyone can offer. An attorney is an integral part of the transaction and only the very foolish enter into those waters without representation

Dear Bruce: When I retired in 1993, I had a home mortgage of $60,000. At that time long-term interest rates were in the 6 percent to 7 percent range. I elected to use the $60,000 to pay off the debt. My retirement income is such that we are in the lowest tax bracket. I deem cash flow to be of more importance. By paying the mortgage off and eliminating the monthly payment, I gained a net of $7,800 positive cash flow while foregoing a possible $3,600 pretaxed income. I think it was the right thing to do, and with today's interest rates, I know it was the right thing to do. J.R., via e-mail

Dear J.R.: I could not agree with you less. Suppose you had continued to make those payments and put that $60,000 into good solid stocks, the run-up from 1993 to 2000, even taking into account the hits that happened afterward, you would have been way ahead of the game. Had you had the foresight to get out near the top of the market you would have been enormously ahead. When you say with today's interest rates you knew it was the right thing to do, I take it you mean the interest rates on the amount of money you used to pay off your mortgage.

If just equated against the payment on the mortgage, I would agree. In most cases in the last decade, you would be way ahead had you invested the money, paid the 6 percent and refinanced when lower-cost money was available.

Dear Bruce: Once I sell my home, I'll need to decide where to invest or place my profit for safe keeping. I will be moving into my boyfriend's new house soon and want to use a small portion of the money to help with decorating and repairs. We are planning a future together, but if the relationship doesn't work or something happens to one of us, what avenue would be advisable where I could access the money, if needed? Reader, via e-mail

Dear Reader: First off, you want to be absolutely certain that you keep your funds totally separate from his. No joint checking accounts, no signing of credit cards together, absolutely nothing. If the relationship works out and marriage follows, that's another matter. Many people have been blinded by Cupid and have lived to regret their decisions. As for the money, if you're looking for absolute liquidity, your choices are in government bonds, possible short-term corporate bonds or the stock market. You should be aware that the market fluctuates, and if you need the money in a down time, you could pay a severe penalty.

Dear Bruce: I am selling 160 acres and will make $250,000 on the deal after expenses. I don't want Uncle Sam to hit me too hard with taxes. What investments are available to me that would be considered a good tax shelter? I am looking at purchasing another plot of ground as my investment. Is real estate the way to go here? J.C., Claflin, Kan.

Dear J.C.: You might wish to consider a 1031 exchange, essentially trading your property for another property. There is no tax savings, but it does put off the payment of taxes. You would have the use of something on the order of $40,000 (for however long you choose to own the next property) that you would have had to send the government in the tax year that this transaction took place. You also should take into account that capital gains taxes have been reduced, and there are many people running for public office who would like to see the capital gains taxes raised. While you may put off the payment of taxes for a while, it's very possible that the tax rate will be higher when you do sell. Just another consideration.

Dear Bruce: You recently wrote about shopping for mortgages and how critical it is to have an attorney representing your interest for this transaction. My wife and I, like every homeowner across country, are hounded by mortgage companies. Mass media has led us to believe that refinancing is as easy as pie. Forms can be sent overnight to you and the deal is done. Can you please explain the potential pitfalls of this type of transaction and why is it worth having an attorney? R.S., Newbury Park, no state given

Dear R.S.: When I discuss mortgages and attorneys, I am customarily referring to buying property, not just the mortgage. The mortgage is an integral part of the transaction, but there is much more to the purchase.

Using an attorney to refinance depends upon the individual involved. It is a reasonably sophisticated endeavor, but I believe that intelligent people who apply themselves and are prepared to read every document in its entirety, and understand what they are reading, can handle this transaction themselves. Most times it is not just the interest rate that has to be considered, but also: the attendant fees; the cost of the credit check; whether an updated survey is required; and whether you have to purchase new title insurance or the old policy can be accepted. All of these variables have to be considered to determine if the refinance is to your advantage. It is a minefield, but one that you can negotiate.

It will take some care and effort on your part.

Dear Bruce: We attended a seminar on reverse mortgages.

The lady assured us that they were safe (backed by the government) and there was no way to lose your house. We need to do some much-needed home repairs. It would up the value of our home when we do sell. We're on Social Security and in our 70s. We've heard all the good points, but the sales lady is not going to tell us about pitfalls. Can you? E.P., Plainwell, Mich.

Dear E.P.: Reverse mortgages are simply a way to take the equity out of your house during your lifetime and have it recovered by your heirs when you're gone. You are guaranteed a life tenancy, even though your mortgageable equity may have been exhausted, but are still responsible for taxes and insurance. The older you are, the larger the withdrawal you are allowed to make because your life expectancy is shorter. By all means get some outside advice and, though it is not absolutely essential, have an attorney review all documents. It shouldn't cost much more than a few hundred dollars, and peace of mind is certainly worth it.