DEAR BOB: We have a home mortgage at 7.25 percent interest with a balance about $23,000. When we talked with several mortgage lenders about refinancing at a lower interest rate, they all said they don’t handle such small amounts. Most said $100,000 was their minimum. One offered us $50,000 but we didn’t accept. We can pay off our mortgage from savings. But we hate to lose our tax deduction. What would you do in our situation? –Vern W.
DEAR VERN: Keeping a high-interest-rate mortgage just for its tax deduction slight savings doesn’t make sense. If you pay $100 in mortgage interest to save $28 in income tax (if you are in a typical 28 percent tax bracket), that is a tremendous waste of your dollars.
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However, please don’t pay off your $23,000 mortgage with savings if that will leave you “property rich but cash poor.” Please be sure you have adequate reserves for emergencies and investment opportunities.
If you pay off that $23,000 mortgage balance, as I would do, I suggest you then obtain a maximum home equity mortgage at the prime interest rate or lower from a local bank. Personally, I have several hundred thousand dollars in home equity credit lines, called a HELOC, just in case I need quick cash obtainable by writing a check on my HELOC.
DIFFICULTY FINANCING FARM SALE
DEAR BOB: I loved your recent item about the First National Bank in Sioux Falls, S.D., where they cashed your dad’s check many years ago while you were on vacation. Today your dad probably would have an ATM card. My parents live not too far away near Brookings, S.D., where they are trying to sell their modest-size farm. The prospective buyers are neighbors who don’t have good credit. The nearby banks go by the numbers and say it would be a very risky loan. My parents are elderly and are too old to farm much longer. Any finance suggestions? –Samantha W.
DEAR SAMANTHA: My suggestion to your parents is to sell their farm with a modest cash down payment from those neighbors and carry back a mortgage. The mortgage payments will provide retirement income for your parents.
If the buyers default, your parents can foreclose and either obtain full payment at the foreclosure sale or repossess the farm. Seller financing is a great way to sell virtually any property. Of course, your parents should consult a local real estate attorney.
IS A “SILENT SECOND MORTGAGE” ILLEGAL?
DEAR BOB: We are what you call “cash challenged” home buyers. But my wife and I both work hard to provide a good life for our two wonderful kids. We are both immigrants. We are now considering buying a three-bedroom townhouse. However, we don’t have enough cash for the down payment. The realty agent suggests a “silent second mortgage” carried back by the seller. As we understand it, the seller won’t record the second mortgage until a few months after the sale. This will help us avoid the expensive PMI (private mortgage insurance) premiums that you often warn about. Is a silent second mortgage risky for us? –Ramon R.
DEAR RAMON: No. As long as you make the monthly mortgage payments on time, you have nothing to worry about. However, if you default on either the first loan or that second loan, either lender can foreclose and you could lose the townhouse. Just be sure you make your mortgage payments on time without any problems.
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