DEAR BOB: I have frequently heard if your mortgage calls for monthly payments, you can make a significant interest savings if you pay twice monthly. For example, my mortgage payment is due on the first day of each month. I would like to pay half of my monthly payment 15 days before the due date and the remainder on the due date. But my lender says the only way I can do this is through a third-party company, which will then charge me a sign-up fee of several hundred dollars plus a monthly fee. If I just pay the lender twice a month doesn’t the lender have to accept my payments and credit my account when received and then calculate the interest based on my payments? –Arthur L.
DEAR ARTHUR: No. You’ve been hanging around with the wrong crowd. When you obtained your home loan, you agreed to pay monthly payments due on the first day of each month with a grace period of a few days. The lender does not have to accept any payments less than the full amount due each month.
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The plan you describe is called a biweekly mortgage. A few lenders offer these mortgages, but they have not proven to be popular.
There are some third-party companies that, for a hefty fee, will deduct from your checking or savings account half of your regular principal and interest payment on the first day of each month and the other half on the 15th day of each month.
The result is the equivalent of making 13 monthly mortgage payments every 12 months, thus shortening your mortgage’s life by about seven years and saving substantial interest.
However, you can do this yourself at no extra cost. Just divide your monthly mortgage principal and interest payment by 12 and add that amount to each regular mortgage payment.
For example, if your principal and interest payment is $1,200, dividing by 12 results in $100. By adding $100 extra principal payment each month (which the lender must accept), you accomplish the same interest savings as a biweekly mortgage.
LOT GIVEAWAY WON’T BE TAXABLE
DEAR BOB: My wife and I own a vacant lot worth $280,000, according to our last property tax bill. We wish to give it to our son and his wife so they can build a house there. What would be the tax consequences for us and them? –Mr. L.M.
DEAR MR. L.M.: Property tax-assessed valuations are notoriously inaccurate. I suggest you obtain a professional appraisal of the lot’s market value so there is no question on that.
You can then give the lot to your son and daughter-in law, preferably using a quitclaim deed. They should obtain an owner’s title insurance policy to be certain they receive marketable title and there are no unpaid liens.
You and your wife can each give up to $12,000 per donee per year without federal gift tax consequences. In your situation, that means you and your wife can give a $24,000 total interest in the lot to your son and a $24,000 interest in the lot to your daughter-in-law, for a total of $48,000. If you do this in 2007, you both could give away another $48,000 total interest in the lot in January 2008 or later, for a total two-year gift of $96,000.
As for the balance of the lot’s market value, you and your wife must file a federal gift tax return. However, no gift tax will be due if your total nonexempt lifetime gifts are less than $1 million each. But when you each die, this amount given away will be subtracted from your federal estate tax exemption, currently $2 million per person for deaths in 2007 and 2008. For full details, please consult your tax adviser.
REVERSE MORTGAGE CAN SOLVE LOW-INCOME PROBLEM
DEAR BOB: My townhouse is worth around $370,000. I owe $129,000 on a 5.35 percent adjustable-rate mortgage until February 2008 when my rate will go up. My only income is about $1,000 monthly Social Security. My children help me pay the mortgage. Should I look for a reverse mortgage? Will it be costly? Will I have to live in the townhouse all of the time? I am 72. –Margarita D.
DEAR MARGARITA: A reverse mortgage could be ideal for your situation. It can be used to pay off your current mortgage so you would have no future monthly mortgage payments. As a general rule, reverse mortgage upfront fees cost 3 to 5 percent. The property must be your principal residence, but you can leave for temporary absences such as spending time in winter or summer vacation areas.
More details are in my new special report, “Everything You Need to Know About Reverse Mortgage Pros and Cons for Senior Citizen Homeowners,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 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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