DEAR BENNY: I am 58 years old and married. I have 22 years left on my 30-year mortgage, which is at 5 percent. I have a Roth IRA. I have some extra money to invest. In this current economy, what might you suggest? Should I pay money toward the principal on my mortgage? Put it in the Roth? I lost money in the stock market (bank stocks), so please don’t suggest that I go back into stocks. Thanks in advance for any knowledge you might share. –Tommy
DEAR TOMMY: Your question is perhaps one of the most difficult ones I have received. I have two crystal balls on my desk and, unfortunately, both are cloudy.
I don’t recommend paying off your mortgage, but you may want to consider sending in extra money every month. This will dramatically reduce your loan balance and shorten the paydown period. If you decide to send in additional money, please make sure that you write "extra payment toward principal" on your check as well as on the payment statement you send to the bank.
I know that readers will challenge me on this; many homeowners believe firmly that it makes a lot of sense to pay off the mortgage so that you do not have to pay all of the interest that accrues. I understand this position, but too many of my clients end up "house rich and cash poor" at age 65 or older. I believe it makes sense to invest your extra cash rather than pay off the mortgage.
Keep in mind that mortgage interest is tax deductible, so the "bite" is not a dramatic as the monthly payment.
OK! Now readers will send me e-mails asking "Where can I invest?" Banks are currently paying less than 1 percent on most deposits. That’s true, but I believe that by the end of the year, banks will start paying more for long-term CDs (certificates of deposit).
In the meantime, I would:
1) Start sending in extra money every month to your mortgage lender. Take your monthly payment (only for principal and interest and not for any escrows) and divide it by 12, and that number should be the minimum of any additional payment;
2) Yes, you should consider increasing your Roth investments, but first you should talk with a financial advisor to get assistance as to how much to invest;
3) Have you considered buying real estate for long-term investment? Prices are low, and while investment money is hard to locate, it’s not impossible, especially if you can put up a sizable downpayment.
If you are not interested in real estate, invest the balance of your additional cash in laddered CDs. This means that you open several accounts with staggered due dates. As the date approaches for each account, you roll over that CD for another period of time. And try to get CDs that allow you to withdraw without penalty at any time.
These are my suggestions; I welcome responses from readers.
DEAR BENNY: My husband purchased a condominium 20 years ago as an investment and has rented it continually during the course of ownership. A few years back the condominium board voted successfully to eliminate all renters. They gave all rental units five years to cease renting. Additionally, they voted that all condominiums must be occupied by the legal owner only.
I can understand the desire to eliminate rentals for all new purchases. Can the association force us to cease renting — thereby affecting our income — and force us to sell in a down market? –Susan
DEAR SUSAN: This is a very serious issue facing condominium associations and unit owners throughout the country. There is the perception among associations as well as mortgage lenders that somehow tenants are going to create problems within the community.
Lenders such as Fannie Mae, Freddie Mac and even the Federal Housing Administration (FHA) impose caps on the percentage of absentee owners.
Perhaps there is some truth to this perception, but from my experience some tenants make better "owners" than the owners themselves.
Be that as it may, however, this issue has been litigated in many states. The courts have been fairly unanimous in holding that if the association follows the proper rules and requirements, the courts will uphold rental restrictions.
What are these proper procedures? First, the restriction must be done by an amendment to the association bylaws; it cannot be accomplished merely by a rule promulgated by the board. Why an amendment? Because to amend your legal documents, it requires a super-majority vote of all unit owners.
Second, the amendment process spelled out in your legal documents must be carefully followed. Was there proper notice? Was there a quorum at the meeting when the amendment was approved? Is the language of the amendment the same as was provided in the notice of the meeting? …CONTINUED
While these are technicalities, they are important.
You and your husband should review the process by which the rental restriction was adopted. If, however, it was done properly, you have no case. Condominium law is very clear that all owners are legally bound not only by the rules and regulations as they were when the unit was first purchased, but by any future amendments properly enacted.
Here’s a thought, however. Talk to your board about getting an extension based on market conditions. But if they don’t agree, discuss your situation with your attorney. You may want to consider doing a Starker (Section 1031) exchange and swap that condo for some other real estate investment.
DEAR BENNY: For medical reasons, I anticipate outliving my wife. If I remarry (or get involved in a long-term relationship), how do I keep my new bride (or significant other) from inheriting the house when I die? –Thomas
DEAR THOMAS: You are an optimist, but I wish you good health and a long life. Although your question sounds simple, the answer is somewhat complex. You should have a last will and testament, which would spell out your intentions with regard to the house on your death.
But a will is not necessarily the controlling factor. For example, if you and your new bride (or significant other) hold title as joint tenants with rights of survivorship (or in many states as tenants by the entireties), then your house will pass automatically on your death to the other person on title. This is true even if your will states some other disposition.
If, for example, you want to leave your house to a child, you can add that child to your title as "joint tenants." But caution: There are tax consequences to this and you should consult a local attorney for more details.
Alternatively, you can keep the house in your name only, and the will you create will be effective. However, in many states, a spouse has rights to take property — even against the clear intentions stated in the will. Again, you have to consult your attorney about the laws in your state.
Finally — and this is always a touchy topic — you can have your new spouse (or friend) sign a "prenuptial agreement" whereby she states in writing that she will make no claim to your house on your death.
DEAR BENNY: We are planning to sell our vacation home in Virginia and then purchase another one as soon as possible. How long do we have between the sale of the first vacation home and the purchase of the second vacation home to avoid paying taxes on the profit from the sale of the first? Is it necessary to strive for a "double-closing"? –Colin
DEAR COLIN: Unfortunately, unless you do a Starker (Section 1031) "like-kind" exchange, where you literally swap one investment property for another, you will have to pay capital gains tax.
Your vacation home is not your principal residence, and the up-to-$500,000 exclusion of gain (for married couples, or $250,000 if you file a single tax return) applies only to your main home.
If you want to do a Starker exchange with your vacation home, there are a number of specific rules that you must follow. First, you must own the property for at least 24 months before the exchange. Next, during the two years before the exchange, you have to rent the property to another person at a fair rental price for 14 days or more.
More important, your personal use during each of the two years before the exchange cannot exceed the greater of 14 days or 10 percent of the number of days the property is rented.
And finally, the exchanged property, which we call the "replacement" property," must similarly be used the same way. In other words, it must be investment property instead of merely a second, vacation home.
Accordingly, in your case, since you call it your "vacation" home, you will not qualify for the 1031 exchange. You will have to pay capital gains tax on the sale of the first property, and it makes no difference when you settle on the second home.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to firstname.lastname@example.org.
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