DEAR BENNY: I bought my condo 18 months ago. The interest rate on my 30-year loan is 6.25 percent. Should I consider refinancing to a lower rate? I plan on staying here and paying off the loan so it seems even if I save some money on a lower interest rate I will be extending my loan and paying more/longer? –Scott
DEAR SCOTT: Since you’ve had your loan for a relatively short time, the costs to refinance your loan may not outweigh the benefits of a lower interest rate.
Let’s take this example: Your loan was $300,000. The monthly payment at a 6.25 percent interest rate is $1,847 (this is only for principal and interest; it does not include escrows for taxes and insurance.)
If you refinance at 5.75 percent, the new monthly payment will be $1,751, or $96 less per month.
You have to do the numbers. Contact your current lender and see if they will agree to allow you to refinance and not charge you all of the settlement costs. Some lenders will be willing to do this.
If not, contact other lenders in your area and compare closing costs. Let’s say that they will run approximately $2,500. It will take you 26 months to begin to see the savings on the refinance loan (divide $2,500 by $96).
So in your case, it’s a close call. But since you plan to stay in the condominium for a long period of time, it might be worthwhile to refinance.
Here are two suggestions should you decide to go that route: First, instead of paying cash for the closing costs, if you have sufficient equity in your unit, have the lender add those costs to the amount of your new loan. This will not increase your monthly payments very much.
Second, if you can afford it, try to make extra payments each and every month, and specifically advise the lender (when you send in your check) of the amount of these extra payments. If, for example, you make one additional monthly payment every year, you will reduce your 30-year loan down to approximately 22 years.
DEAR BENNY: I’ve been enjoying reading your advice in the Real Estate Mailbag since you took it over. But I was concerned by your response to the question about disposing of timeshares. One option, you said, was to "donate the property to a charitable organization."
I wonder whether you’ve actually talked to charities to see whether they welcome donations of timeshares. In my little church parish, we have had timeshares donated by people who did not consult us first. The timeshare ends up being a huge headache for the parish’s officers as we figure out what to do with it. Please advise people always to check with the charitable organization, for it may be more of a liability than a benefit. –Nicholas
DEAR NICHOLAS: I appreciate your comments, and you are absolutely correct. Readers who want to get rid of their unwanted timeshares should consult with their charity before making the transfer. Some charities will accept a timeshare but others may not.
DEAR BENNY: Last year, I was experiencing severe financial hardship and my home was in foreclosure proceedings. To prevent the loss of my home, my sister agreed to "buy" my home from me temporarily. The mortgage is in the amount of $165,000. I put down $10,000, which leaves a mortgage balance of $155,000. I have been making all monthly mortgage and tax payments on the home (the mortgage payment is $1,195; tax escrow $205). The title is in my sister’s name. My question: What is the quickest way to regain ownership of my home? Needless to say, my credit score is not the greatest. –Nancy
DEAR NANCY: Unless there is more to this that I do not understand, I would think that your sister can deed the house back to you in the same way that your earlier deeded it to her.
Technically, when you "sold" the house to your sister, the lender probably had the right to call the loan, based on the "due on sale" clause that I suspect is contained in your mortgage document (called a deed of trust).
You are current with the mortgage payments. So I would just arrange to have your sister transfer the deed back to you. Make sure that the deed reflects the same purchase price as when she received it, since you don’t want your sister to have to pay any capital gains tax.
But you should consult an accountant to determine how your tax return should be handled. You may have to provide an explanation to the Internal Revenue Service as to how and why this transaction occurred.
DEAR BENNY: My husband and I will be moving in the next few months to a much cheaper housing market. I have enough saved to buy a nice house for cash and still make payments on my existing house until it sells. I do not have to touch my investments to do this. I keep getting conflicting advice about whether buying a house for cash is a smart idea. What do you recommend? –Nancy
DEAR NANCY: I cannot make any recommendations; this is a personal decision that only you can make — after you review all of the alternatives.
The first question to ask yourself: As you both get older, will you be "house rich and cash poor"? I have too many clients who own their own house free and clear of a mortgage but cannot afford the upkeep or to pay the yearly insurance and real estate taxes.
Do you have an income? Can you use tax deductions? If you pay all cash now, and later decide to get a mortgage, unless you borrow the money to make improvements to the property you will be able to deduct interest only on the first $100,000 of the new loan.
No, it does not pay to borrow money at 6 percent and keep your money in the bank earning only 4 percent. But I have always suggested that homeowners keep money in reserve for that rainy day. I also remember back in the 1980s when my money market account was paying me almost 18 percent interest. So if you have other investment opportunities, use your money for those purposes and borrow to purchase your new home.
Keep in mind that real estate should (and will) appreciate over the years at a rate of 3-5 percent annually. This appreciation will take place regardless of whether you paid cash or took out a mortgage. In my opinion, the money you invest in real estate is, in effect, "dead equity."
You may want to consider refinancing your current home, pull out some of that equity, and rent it out instead of selling. However, if you have made a lot of profit, you don’t want to lose the exclusion of up to $500,000 (if you file a joint tax return). You have to live and own the house for two out of the previous five years before it is sold. So watch your time limitations should you decide to rent.
DEAR BENNY: My husband and I would love to buy a bigger house for our growing family. Due to the decline in prices for homes in our area, this is a really good time to buy. Unfortunately, we owe more money on our current house than we can sell it for. Ideas that have been given to us are buying the new property and letting our current property foreclose. We have also been told we can try to sell the home for less than what we owe and carry the rest of the amount on a "note." We have also heard the term "short sale." What options do we have in our unique situation and what would you recommend? –Patricia
DEAR PATRICIA: Unfortunately, you are not in a unique situation. There are too many homeowners with what is called "upside-down loans" — where the loan is currently worth more than your house.
I cannot under any circumstances recommend that you let your house go to foreclosure. That’s the very last thing you want, since it will seriously affect your credit and for some time you will not be able to get another mortgage loan — or any decent credit for that matter.
As for taking back a note, that would mean that your potential buyer would pay you enough to pay off your existing mortgage and give you a promissory note for the difference. This does not make sense, since that means that your buyer would be paying more than the house is currently worth.
As for a short sale, that’s a possibility you should discuss with your lender. But you want to make sure that if the lender agrees to a short sale that it will not have a negative impact on your credit.
My suggestion: Stay where you are. I am optimistic that real estate prices will increase sometime in the near future. In the meantime, if you can afford it, I would start making extra payments to your lender, so as to bring down the balance as quickly as possible.
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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