DEAR BOB: My husband and I owe about $57,000 on our home mortgage at 6.75 percent interest. We have that amount in a money market account, which only earns around 4 percent interest. I think we should take that money to pay off our home loan and never have to worry about mortgage payments again. I am 58 and my husband is 56. He took an early retirement buy-out from his employer, but I still work as a legal secretary because I enjoy getting out of the house each day. Do you think we should pay off our mortgage now? –Marilyn H.
DEAR MARILYN: If paying off your mortgage will deplete your liquid reserves, I suggest you do not rush to pay off your home loan. However, if you have lots of idle cash sitting around the house, and you are 100 percent certain you will never need the $57,000 again, go ahead and prepay your mortgage.
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Although that 6.75 percent interest rate might seem high, it really isn’t when you consider its after-tax cost. Presuming you itemize tax deductions, your after-tax cost of that mortgage is around 4.75 percent.
The big problem most folks don’t think about when prepaying a home mortgage is that they might need that money again in the future. If that happens, especially when they are retired, sick or unemployed, they are often unable to borrow on their home except at loan-shark interest rates and terms.
If you decide to prepay your home loan, before you do so, I highly recommend you obtain a home equity credit line (HELOC) now while you are still working and have adequate income to qualify. That HELOC won’t cost anything, except a $50 annual fee, but it will bring peace of mind knowing it is available by just writing a check in case of an emergency.
WHAT IF MORTGAGE APPRAISER IS WAY OUT OF LINE?
DEAR BOB: My wife and I recently applied for a reverse mortgage on our home. I am 74; she is 72. Our relatives tend to live until their 90s so we thought obtaining a reverse mortgage would be smart. We agreed on the terms with the reverse mortgage lender, subject to the appraisal. Based on nearby home sales, we estimated our home would appraise for around $450,000. However, we were shocked when the lender’s appraiser estimated only $387,000 for our home’s value. While she was appraising our home, she made several negative comments, which we felt were out of line, but we ignored them and didn’t argue. Do you think the lender told the appraiser to appraise very low? –Stan C.
DEAR STAN: That is possible. Or perhaps you have an overly optimistic estimate of your home’s market value.
Your best recourse is to contact your reverse mortgage representative to discuss the appraisal. Request a review of that appraisal and, if necessary, ask for reappraisal at the lender’s expense.
WHAT IF DEFAULTING HOME BUYER WON’T RELEASE DEPOSIT?
DEAR BOB: We thought we sold our house. Everything was set to close on Jan. 5, 2006. The buyers signed off on all the contingencies. They made a $15,000 deposit. But two weeks prior to the closing date, the buyer’s agent said the buyers did not want to complete the purchase. We later learned they bought another house. Over the next few months we sent several letters to the buyers at their old and new homes to obtain a release of the $15,000 deposit. No reply. We hired an attorney, but he hasn’t received any response. Our Realtor refuses to get involved. The sales contract provides for mediation and arbitration. Is there any way we can get that $15,000 without a costly lawsuit? –Tim and Joyce K.
DEAR TIM AND JOYCE: I presume your attorney attempted to notify the buyers their sales contract requires mediation of the dispute and if that fails, then binding arbitration applies. When he received no response there is now no choice but to file a lawsuit to obtain release of that $15,000, which I presume is being held in escrow trust.
If you do nothing, in most states whomever is holding that $15,000 deposit in trust must eventually file an interpleader action in court to determine who gets the money. You could ask the party holding the $15,000 to file the interpleader action now, thus avoiding a lawsuit, and let the court decide who gets the $15,000.
The new Robert Bruss special report, “Pros and Cons of Fast and Slow House Flipping for Big Profits,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
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