DEAR BOB: What is an “interest only” mortgage? We have a 4.875 percent adjustable-rate home loan, but another bank offers 4.25 percent “interest-only.” Is this a good or bad deal? – Vincent P.
DEAR VINCENT: Interest-only home mortgages have become extremely popular with home buyers and homeowners seeking to minimize their payments by refinancing.
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An interest-only home loan is usually an adjustable-rate mortgage (ARM) with the monthly payment locked-in for a specified term, such as 12 months. After that, the payment adjusts, depending on its index plus a margin (like all ARMs).
There are pros and cons. If you expect to stay in your home less than five years, an interest-only mortgage keeps your monthly payments at fully tax-deductible rock-bottom. You won’t be paying down the principal balance but, if you will be selling in five years, who cares?
However, many interest-only mortgages have “negative amortization” or “negative am.” That means your monthly interest-only payment remains fixed for the specified term, but the ARM interest rate adjusts monthly or semi-annually. Any unpaid interest is added to the principal balance. The result is you could owe more than you borrowed.
A variation on interest-only mortgages is the so-called “option mortgage.” That means the homeowner has the option of paying interest only each month, or partially paying down or amortizing the balance, or fully amortizing the mortgage balance.
The option mortgage would be desirable if you expect to stay in the home many years, but you can barely afford the interest-only choice now. If you expect to earn more income in a few years, you can later start amortizing the mortgage to pay down its balance.
IT’S A GREAT INVESTMENT TO PAY EXTRA ON 5 PERCENT MORTGAGE
DEAR BOB: I have been reducing my 15-year, 5 percent interest-rate mortgage by paying extra principal each month. My friend says I shouldn’t do that because I won’t save much and I am better off investing elsewhere, as I have 13 years left. Your opinion, please – Kevin L.
DEAR KEVIN: I think you are a smart investor. Every time you pay extra principal to reduce your mortgage balance, you just made an investment earning 5 percent.
Ask your friend if he or she knows of a better, safer investment than building equity and saving 5 percent interest on your home mortgage.
CAN STATE LEVY GIFT TAX ON PARENT-CHILD DEED?
DEAR BOB: My wife and I own a second house in Connecticut. Our son, his wife and their children live there rent-free. Last year, we added our son and daughter-in-law to the title with us. We are still on the title, and we pay the property taxes and mortgage payments. The great State of Connecticut sent us a letter indicating we might owe gift tax. We thought since we are still on the title and pay the property taxes and mortgage, this is not a gift. Do we owe state gift tax? – Robert N.
DEAR ROBERT: I am not a Connecticut real estate attorney or tax adviser, nor do I play one on TV. Please consult a Connecticut tax adviser.
But I am a California attorney so I can give you a general answer. If you gave away a specific interest in the property, such as 50 percent, you might owe a state gift tax.
However, if you added your son and daughter-in-law as joint tenants with right of survivorship to avoid probate when you die, no gift tax is normally due because you might survive the donees so no real gift would then result.
However, the federal gift tax situation is very clear. You and your wife can give away up to $1 million total lifetime gifts without owing federal gift tax. But gifts exceeding $11,000 per donor per donee per year require you to file a federal gift tax return even if no gift tax is due.
Also, the total of your exempt lifetime gifts up to $1 million will be subtracted from your federal estate tax exemption, currently $1.5 million per person if you die in 2005.
SHOULD HOMEOWNER REFINANCE ON THE INTERNET?
DEAR BOB: I would like to refinance my home mortgage. I have heard a lot of talk about Internet mortgages. Is this a safe place to apply for a mortgage? Are there any online mortgage companies I should be wary of? Or should I just apply with someone in person? – Eileen L.
DEAR EILEEN: Several years ago, when I wanted to refinance my home loan, I applied online with major lender Countrywide Home Loans. After filling in the Internet application blanks, the next day I received a phone call from a Countrywide operator who had no clue about the different types of loans available. She admitted she had no approval authority. I was very disappointed so I then obtained my mortgage refinance from a local mortgage lender.
However, I had an excellent Internet experience with Wells Fargo obtaining a home equity credit line on my second home. There were no surprises. They did a drive-by appraisal, didn’t require income verification, and couldn’t have been nicer.
But many readers have complained about Internet lenders who promise: “We have lenders fighting for your mortgage.” Some of those online lenders fail to deliver what they promise.
If you obtain a refinance mortgage from a local loan originator, such as a mortgage broker, mortgage banker or local bank, you know where to find them if there is a problem.
WHY WOULD REALTY AGENT UNDERPRICE A HOME?
DEAR BOB: You recently mentioned some realty agents underprice homes to make quick sales. I thought realty agents want to sell listed homes at the highest sales prices to maximize their sales commissions. After we recently interviewed two agents about listing our home for sale, we listed and sold the home within three weeks for a price higher than either agent suggested. You are right to advise interviewing several realty agents, but you never explain why an agent would underprice a home – Joan M.
DEAR JOAN: Surprisingly, most realty agents don’t care if your home sells for $200,000 or $220,000. The exact sales commission, after it is split with the buyer’s agent and the brokerage office, isn’t usually that important to most agents.
What really matters to realty agents are the listing (a) control and (b) sale before the listing expires, typically in 90 days.
There are three possible reasons a realty agent might suggest underpricing a home below its market value: (a) the agent is out of touch and doesn’t keep up on recent comparable home sales prices; (b) the agent wants a quick easy sale if the home seller has no clue as to the true market value; and (c) the agent and seller agree to intentionally underprice the home to create a “buyer frenzy” to drive the ultimate sales price above the low asking price. Unfortunately, this misleading tactic for buyers is perfectly legal and does not violate the Realtor’s code of ethics.
NO VALID EXCUSE FOR BRAND-NEW HOUSE DRIVEWAY ENCROACHMENT
DEAR BOB: My son and his wife just moved into their brand-new home. The next-door neighbor told him the builder of both homes put the neighbor’s driveway 2 or 3 feet onto my son’s property. The builder says he would have to cut into the neighbor’s property to make it right. The neighbor wants my son to give him the necessary footage. My son wants to be a good neighbor. But his wife says she won’t sign anything agreeing to that. I agree with her. I think it’s a problem with the builder, not with the neighbor. What recourse does my son have? – Mae LeB.
DEAR MAE: You gave your son superb advice. He should not sign anything until he first consults a local real estate attorney.
His primary recourse is against the home builder who created the driveway encroachment. Another recourse is against the title insurance company if your smart son obtained an owner’s title insurance policy. Then he has two “deep pockets:” the home builder and the title insurer.
This problem should be resolved now. The reason is when your son and his wife eventually decide to sell their home, a surveyor or the title insurer will discover that significant driveway encroachment, which can hurt his home value and saleability.
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