DEAR BOB: We are thinking about refinancing our home loan, which has a 6.75 percent interest rate. The mortgage broker who made us our loan several years ago offers an “interest only” mortgage at 5.75 percent guaranteed for five years with no closing costs. As we plan to sell our home in three or four years, is this a “good deal?” – Ron R.
DEAR RON: The big advantage of an interest-only home loan is 100 percent of your monthly payment is tax-deductible interest. Another advantage is your payment is as low as it can go at that interest rate.
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The reason, of course, is there is no mortgage amortization or balance pay down. If you expect to sell your home in a few years, mortgage balance reduction is probably of zero concern to you.
However, if you expected to stay in your home “forever,” then a zero-interest mortgage might not be a smart decision because you will never own your home free and clear with no mortgage.
OLDER HOMEOWNER SUGGESTS BUYING A HOME WITH ONE LEVEL
DEAR BOB: My wife and I have been faithful readers since your excellent articles began appearing in our newspaper. Because we plan to stay in our home until they carry us out, we have not needed to act on much of your superb advice. But, as senior citizens, it occurred to me your readers might benefit from my suggestion to buy a home on one level. We bought a one-level home, with a gently sloping driveway, so that as we age we need not be concerned about climbing steps. Just thought you and your readers might benefit from this suggestion – Mr. R.E.
DEAR MR. R.E.: Thank you for your valuable suggestion.
Personally, that’s why I bought my one-story rancher house 26 years ago. I anticipate when I get too old and feeble to climb the two steps from my attached garage to the house, it will be time to move to an old folk’s home. Until then, like you, I’m staying in my one-level home.
NO TAX DEDUCTION FOR UNSECURED BORROWED MONEY
DEAR BOB: Last year, my generous mom and dad loaned my wife and me $45,000 for the down payment on our home. We agreed to pay them 5 percent and have been faithfully paying each month. Can we deduct this interest on our 2004 income tax returns? – Nate W.
DEAR NATE: The answer depends whether or not your parents have a security interest in your home, such as a second mortgage. If they made you an unsecured loan, then your interest payments are not tax deductible.
However, if your promissory note is secured by a second mortgage or deed of trust recorded against your home, then you can deduct the interest you pay your parents on your tax returns. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Robert’s Realty Rules: How to Avoid the 10 Worst Home Buyer Mistakes,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet PDF download at www.bobbruss.com. Your questions for this column are welcome at either address.
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