Undisciplined borrowers beware of interest-only mortgages

Dear Reader: Mortgage du jour right now is “interest only.” In some circumstances it makes sense. The problem for the undisciplined is that their outstanding balance never gets reduced and they’re tempted by the interest-only, no amortization, to go into debt that they cannot afford. More and more lenders are becoming less enthusiastic about this type of arrangement because it is making their loan portfolio less solid. There are times when an interest-only mortgage makes sense, perhaps for someone who is going to sell the home in a very short period of time, but needs access to a portion of their equity to purchase a second home. On balance, I am not enthusiastic about interest-only loans.

Principal payments not a given

Dear Bruce: Can you recommend a method of payment so we can pay off our 30-year mortgage in approximately 15 years? We have heard of various plans but do not know which are reliable. – D.R., via e-mail

Dear D.R.: There is no reason to go to any specific plan as such and pay for the privilege. Most mortgages allow prepayment without penalty. You can send them whatever amount of extra money per month to be applied to the principal. If you choose to do this, your lender can provide a schedule that will show you how to amortize it in 15 years. Whether this is smart to do is quite another matter. If the interest rate is low, you would ordinarily be better off taking that extra money and investing it in the marketplace. While the market does fluctuate over a period of time, you are very likely to do better than prepaying on your mortgage. In effect, if you prepay, what you are doing is investing your money for whatever rate the mortgage is charging. If it’s only 6 percent or 7 percent, you would be way better off to invest in a good growth fund.

Simple will eases property transaction

Dear Bruce: In 1979, my parents purchased two beach lots for $7,000. They have appreciated to $185,000 today (that’s the amount they pay taxes on). If they wish to leave one lot to each of their two children, what is the best way to do so with the least amount of tax consequences? Can they just change the name on the deed, or should they put the lots in a trust for each child? Do you have a better idea? – K.N., via e-mail

Dear K.N.: The assessment amount of the property doesn’t necessarily reflect its value. It is likely worth more. Not always, but usually. They can easily enough leave a lot to both of you. There will be no tax consequences, assuming your parents’ estate is not very large. If the properties are transferred now, there will be taxes, although a claim can be made against their lifetime exemption. I would just keep things where they are and draw up a proper will.

Keeping mortgage may be best

Dear Bruce: This summer, I will be inheriting approximately $100,000. My current mortgage balance is $40,000. Should I use this money to pay off my mortgage or invest the entire amount? – Reader in Idaho

Dear Reader: Your letter lacks a few major facts, such as your age and other financial details. But assuming you are under 60 and have reasonable investment acumen, I would be inclined to keep the mortgage. What’s the interest rate on your mortgage? If your rate is substantially more than 8 percent, it may be a good idea to see if you can refinance a lower rate. And what’s your income? That would have a bearing on your tax liability. On balance, until one starts to approach that “seasoned citizen” range, you can do better by investing the money and retaining the mortgage.

Mortgage company holds title releases

Dear Bruce: I recently paid off the mortgage on my home. The mortgage was purchased from the private individual who financed the entire transaction. How do I go about getting the cleared title filed? – C.W. in Mississippi

Dear C.W.: If the individual was acting as the mortgage company, then they would be holding the appropriate releases. Check with them, and if they can’t figure it out, then you might have to hire an attorney to sort it out for you. Congratulations on being debt-free.

Life rights guarantee residency

Dear Bruce: My mom passed away some years ago and left her home to my siblings and me. However, we gave her brother, our uncle, life rights to continue living there. The home is in good condition, he pays all the bills and generally, we all get along well with him. The problem is that I need my share of the money out of the house to pay for some unexpected medical problems. Is there some way I can get my share of the equity? – L.S., Exton, Pa.

Dear L.S.: Unless you can persuade one of your siblings to buy out your interest, there’s not much you can do. If your family members are in a position to advance you money against your ownership, it would be a decent thing for them to do. Your uncle was given life rights for a very specific reason, and that was to keep anyone from selling the house during his lifetime. As long as he meets his obligations, he will get to stay there.

Reverse mortgages aren’t for everyone

Dear Bruce: I called our bank to inquire about a reverse mortgage. We were told they don’t recommend them and they are expensive. My husband talked to another person, and she said the same. She doesn’t think there is anyone in this area that offers them. We took an equity loan, and the interest is 7 percent. I would like your opinion. – W.S., Sheboygan, Wis.

Dear W.S.: This is another area where there is no right or wrong. Your banker is incorrect when he says they are too expensive. If he said they “can” be too expensive, he would be correct. Like most other financial instruments, reverse mortgages can play a positive role for many folks. The older the applicant, the more equity can be extracted from the property because your life span is shorter and the lender only gets paid upon your demise. You mentioned you took a home-equity loan. The problem there is payments have to be made immediately every month. In the case of the reverse mortgage, no payments are made until after your demise. In fact, payments are made to you. They are two entirely different environments. Reverse mortgages are like money from home for some people, and for others, particularly younger seniors, probably not a very good choice.

Trees don’t respect property lines

Dear Bruce: There is a tree at the end of my driveway between my neighbor’s property and my own. The tree’s roots have done some damage to my driveway, as well as to my neighbor’s. I have checked with officials and have been told that the tree is completely on my neighbor’s property. On several occasions, I talked to my neighbor about splitting the cost of tree removal, but he said he couldn’t afford it. However, my neighbor said if I wanted to remove the tree, he’d give permission. In the meantime, he has a very expensive car parked in the driveway and has had several improvements done to his home. What should I do? – M.S., Manchester, N.H.

Dear M.S.: You can either put up with the damage to your driveway or have the tree removed at your expense. The reality is, there might be some legal responsibility on the part of your neighbor, since there is damage being done. Tree roots do not respect property lines, however, and I doubt seriously if you’d be successful in a small-claim action. While your neighbor chooses to act irresponsibly, until things get a lot worse, I have a feeling you’re either going to swallow hard and have the tree removed or suffer the damage.

A 1031 exchange masks tax liabilities

Dear Bruce: I would like your advice on what to do with my future investments. I am 49 years old. I have two daughters; one is a freshman in high school (private) and the other is a freshman in college. I would love to retire in about four years and would like to know if you think it is possible. My current home has $500,000 in equity. I have some land that is worth $600,000. (I owe $280,000.) For the next three years, I have an interest-only payment of $28,000 due. At the end of three years, the note is due. At that point, the land should be worth $845,000. I also should mention this land is in a 1031 exchange. Once I cash this in, the taxes will be due. I also have another $100,000 in assorted investments. Any advice? – K.B., via e-mail

Dear K.B.: You threw me a curve when you said the property was in a 1031 exchange. That disguises what your true liability will be, and that could be a rather substantial bite. Other things considered, you might be able to hit your very early retirement, but I’m not certain why you would want to do that. You haven’t indicated the source of your income now and how much more you will be able to put aside. While $1 million-plus sounds like a great deal, in today’s world, without taking a degree of risk, it will not generate huge amounts of money after taxes. Even if you were to invest primarily tax-free, you would probably bump up against the alternate minimum tax. You have done very well, but I’m thinking you might look ahead to an eight- to 10-year retirement, rather than four.

Retirement communities satisfy many

Dear Bruce: We have looked into 55-plus retirement communities where they rent the lot to you and put your manufactured home upon it. The monthly fees include the lot, activities fees, water, trash, lawn maintenance, etc. Most of the homes sell for $50,000 to $100,000, but you don’t own the land. What do you think? – C.L., Springfield, Miss.

Dear C.L.: What you are describing is a relatively common thing in Florida. While I’m not wildly enthusiastic about renting the property, the likelihood is that they give you a 100-year lease, and by then, I don’t think that it’s going to matter to either one of us. If you put the numbers together and you are satisfied with the way that the community is being maintained, I have no quarrel with this. I have a friend who lives in one of these homes and is delighted.

Bruce Williams is a national radio talk show host and syndicated columnist. He can be reached at bruce@brucewilliams.com.[[In-content Ad]]