Pay off mortgage with lower-rate HELOC?

Retaining tax benefits a top concern

DEAR BENNY: I have about $40,000 left on my 15-year fixed mortgage at 4 percent interest. I owe about $13,000 on a home equity line that is 2.99 percent variable rate. I have a $100,000 equity line open. I have no other debt. I am considering paying off my remaining mortgage with the lower-interest home equity line. Do you think that is a good idea since I am giving up a fixed rate for a variable rate? I would pay both off in about three years. Also, if I close out my mortgage, can I still declare the interest on my taxes from the home equity line? –Wade

DEAR WADE: In general, I am always reluctant to advise readers to switch from a fixed interest rate to a variable one. I am old enough to remember when mortgage interest rates soared to 18 percent.

However, this is a personal decision for everyone, depending on your own financial situation. In Wade’s case, he will be paying off $40,000 at a current low rate, and because he has a home equity loan (called HELOC) of $100,000, if push comes to shove he will still have borrowing capability should he need cash to make the required mortgage payment on the new loan.

Wade, if you have other cash — just in case — then I think it makes sense for you to use your home equity loan to pay off your existing mortgage loan.

As for deducting the interest you pay on the HELOC, in general, you can deduct interest on such a loan up to $100,000 only. Let me clarify this: It does not mean you can deduct $100,000 of interest. It means that any interest earned on a loan amount over $100,000 is not deductible. In your case, since your HELOC is not over that threshold — and subject to any other limitations such as how high your income is — you should be able to deduct all of the interest you pay on the HELOC.

DEAR BENNY: I read your article on the "Dos and don’ts of holding home’s title in LLC." You note that a limited liability company (LLC) can protect against judgment for lead paint. However, I was also reading a case in Maryland where the court ruled there was no protection from personal liability if the LLC member was managing the property. I also believe that courts in California and several other states similarly have a narrow definition on the protection from LLCs.

So it does not appear that what you said about protection with LLCs is applicable across the country. Any thoughts? –Peter

DEAR PETER: Yes, there are narrow definitions on the protection afforded by owning property in an LLC. In the Maryland case, the member was managing, so he was personally actively involved; in other cases, the LLC commingled funds with other assets. I once represented a managing member who was sued personally; unfortunately, he did not take my advice since he issued a check out of his own personal checking account.

And I just read a case out of the 6th Circuit Court of Appeals (which covers Ohio, Kentucky, Tennessee and Michigan) where a homeowner put her personal home into a single-member LLC. She had filed for bankruptcy relief and claimed that her creditors could not attach her house because it was her homestead. The court ruled against her, stating that since she personally did not own the home, the homestead exemption did not apply.

But in general, LLCs will provide some protection. And if you are an investor, do not put more than one property into an LLC; set up a separate LLC for each property.

I always tell readers that I can provide only general info; each reader should get his or her own attorney to provide specific guidance.

DEAR BENNY: In a recent column a reader inquired about possible liability after a "deed-in-lieu" has been negotiated and agreed to but the actual title on the deed has not been transferred to the bank by recordation of the deed.

You recommended she maintain adequate homeowners insurance until the deed transferring title is recorded. Surrendering possession of the property and her inability to access the home would give rise to the presumption that she no longer occupies the house.

I question whether her "homeowners" insurance would be sufficient even if the policy continued. The policy and the accompanying rates for homeowners insurance presuppose the owner is occupying the property as her residence. Her failure to live in the house could negate any claim made. Your thoughts? –Chris

DEAR CHRIS: The insurance policy goes with the insured. It is a personal contract, so the homeowner is still the insured absent some other formal understanding in writing between the deed-in-lieu lender and the homeowner.

However, as you suggest, in this interregnum period between delivery of the deed and the actual recording of that document, if the home is vacant and unoccupied (depending on insurance definitions in the policy and used in state law), then the homeowners insurer may decline coverage.

If you are in this situation, discuss the matter with the lender as well as your homeowners insurance agent. Obviously, you do not want to pay extra money for unnecessary insurance coverage, but at the same time you don’t want the house to be damaged with no coverage, giving the lender an excuse to reject the deed-in-lieu.

DEAR BENNY: I was negotiating with an owner to purchase a property containing a vacant, boarded-up house. Over the years the owner would occasionally come into town and clear the weeds, as he lived out of state. During one of these visits to his property he and I engaged in discussions for selling. He looked into finding the property value with a local Realtor before heading back home. Six months later I learned that he unfortunately passed away.

I have contacted the next of kin of my interests by letter, but he lives out of state. It has been a months and I have not received any response. During title search the property profile now shows that the property taxes are delinquent.

Here’s my question: Would I have a better chance of acquiring this property if I were to pay and bring current the property tax? –Tony

DEAR TONY: If you want, I will let you pay my real estate tax, too. No, unfortunately, I doubt that it will assist you in buying the property. It may avoid the property being sold at a tax sale, which, by the way, may be one way that you can get it.

Here’s my suggestion: Have an attorney do a title search for you. This should not cost more than $300. You want to find out the status of title: Is there a mortgage? Are there any outstanding liens (such as from the IRS) against the property? Is the house underwater?

You really need to have a full understanding before you pursue buying the property. Once you have all this, try to contact the next of kin again. Send him a letter (registered, return receipt requested) telling him that the property real estate taxes have not been paid and that at some time in the future, it will be sold at a tax sale. Tell them that you are interested in buying and make them an offer. Your offer should reflect a fair market value, minus any real estate commission.

However, you should not advance any money (such as paying the real estate tax) until you actually get a deed in your name and have it recorded among the land records where the property is located. I have encountered too many situations where people are literally ripped off based on their trust of someone.

Recently, for example, a landlord client gave her tenant $1,000 on the condition that the tenant would move out by the end of December. As of that date, the tenant had not moved, but had already spent the $1,000. I told my client, "You should have said, ‘When you move out and give me the keys, I will give you the money.’"

By the way, the property may have to be probated. Talk to a local attorney. If there is a probate proceeding, you (or your lawyer) will be able to talk with the administrator of the probate estate and that may be the way to get you title to the property.

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 benny@inman.com.

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