DEAR BENNY: We have a HELOC (home equity line of credit) at a current interest rate of 4.75 percent. We have not drawn on the account. We are 20 years into a 30-year home mortgage with a fixed rate of 8.75 percent and owe about $32,000. Our home is listed on the appraisal rolls at $306,000. We would like to draw on our HELOC to pay off our first mortgage. We understand that the 4.75 percent is not a fixed rate and will be adjusted monthly depending on the prime rate. We also understand that we must pay interest on it monthly and in nine years will have to begin repaying principal. There are no prepayment penalties.
It sounds too good to be true that we could pay off our 8.75 percent mortgage loan with a HELOC at a current rate of 4.75 percent. Are we missing something? –Barbara
DEAR BARBARA: You raise an interesting issue, one with a number of caveats. As you have indicated, your HELOC has a floating and not a fixed interest rate. Most of these loans have rates that actually change on a daily basis. There is no guarantee what the rate of interest will be one year, two years or eight years from now. I vividly remember back in the early 1980s when interest rates were hovering close to 20 percent.
You run a serious risk that one day in the future you may have to start paying more than 8.75 percent interest.
A second issue to consider relates to the tax deductions that you get from your mortgage interest payments. While this should not be a major deterrent in your thinking, you do have to recognize that you will get fewer deductions under your plan.
Another issue involves the terms and conditions of your HELOC. Unless you plan to pay off the entire first trust (mortgage) immediately, you run the risk that your lender may put restrictions on your HELOC in the future. I have a number of clients who have just received letters from their HELOC lender that their account has been frozen (or else the amount they can borrow has been reduced) based on the lower appraisal of their property.
Yet another concern is the fact that I believe that a HELOC should be used for that "rainy day." It’s nice to have a checkbook in your desk drawer that you can use, if you suddenly are in need of additional cash. If you use your HELOC to pay down your mortgage, what will you do if you are suddenly confronted with that "rainy day"?
You have a very high-interest first mortgage. Currently, interest rates are very low — in fact, almost at an all-time low. Instead of paying off the mortgage using your HELOC, why not consider refinancing and keep the HELOC as is? (The HELOC lender must agree to allow you to subordinate that loan to the new first, but usually that is not a problem.)
You have considerable equity in your house, and assuming that you have good credit, you should not have too much trouble refinancing, even in today’s tight money market.
DEAR BENNY: I own the second floor of a duplex condominium. I pay 60 percent of the common expenses because my unit is bigger, while the owner of the first-floor unit pays 40 percent. Our building needs a new roof because shingles are blowing off, the remaining shingles are flaking and curling, and I had a leak in my unit.
I have gotten three estimates on reroofing (putting shingles over the existing shingles). The owner below me does not feel the building needs a new roof. She insists on seeing damage to my unit before she will agree to a new roof.
The previous leak has dried up, and there is no present evidence that there ever was a leak. Do I have to have damage to my unit before she has to agree to a new roof? How can I go about getting a new roof? –Carolyn
DEAR CAROLYN: The first thing that anyone who has a problem in a condominium must do is to review the legal documents, which are typically the bylaws and declaration.
What do the bylaws say about repairs? Are there any provisions for resolving disputes between the two of you? …CONTINUED
I assume that you did not take pictures of the damage before it dried up.
I would have the contractors that gave you estimates meet with the owner and explain the situation. I recognize that your co-owner will consider this just a "marketing" spiel from the contractors, but hopefully they can convince her to approve the repair work.
You may also want to get your insurance companies involved. I suspect that if you currently know that the roof is leaking and take no immediate action, any future damage claims may be rejected by those companies. This fact should be made known to your co-owner. You should put her on notice that if there is another leak, and if it is not covered by insurance, you will try to hold her personally responsible for your loss.
Finally, as a last resort, unless there is a dispute resolution program in your area, you may have to go to court and seek a declaratory judgment, whereby the court — if satisfied that there really is a problem — will order the condominium to make the repairs.
DEAR BENNY: I own a house across the street from a public high school. This school has become the meeting point for teenagers in the town at late hours. Loud cars and music often disturb my sleep and that of my neighbors. Calls to local authorities will disperse the crowds, but only for a short time. Later, the kids come back and the noise starts all over again. Currently, the area is not blocked off at night. Can we as homeowners do anything to force the school to take measures to secure this area? –Don
DEAR DON: I would treat this as a political issue and contact your mayor, and your elected city representatives. I would also try to get some publicity in your local media (TV and newspapers). That should work.
I also suggest you not go it alone, but round up as many neighbors as you can to join you in your protests. As the old saying goes, "In unity there is strength."
DEAR BENNY: I am an investor in a limited liability company (LLC) that purchases downtrodden homes, renovates them and holds them as rental properties. I am the financier of the capital to do the purchasing and renovation. To date we have cash-out refinanced all properties and closed the refinancings in the LLC. However, for the remaining two properties we are unable to close in the LLC. Lenders just won’t permit it.
What is the practical significance of closing in or out of the LLC? If the presumed advantages of closing in the LLC are significant, what would you advise I do? I do want to do a cash-out refinancing of these two properties. –Christopher
DEAR CHRISTOPHER: I know that banks and other lenders may have their reasons, but, to me, refusing to make a loan to a limited liability company makes no sense. From my own experience, many banks will loan money to an LLC, but to ensure that they will get paid, they ask the members of that company to personally guarantee the loan.
If your property is entitled in an LLC, and if there are no other properties in that same company, generally speaking any of your other personal assets are not at risk should the LLC default on its loan payments. That’s the main reason for creating a limited liability company. You get the same benefits as if it were a regular corporation — i.e. insulation of personal liability — but with a lot less paperwork and less tax to pay.
If your bank is refusing to allow a cash-out for your company, shop around for other banks. But I must warn you: Banks are not making a lot of loans nowadays, and any loans that they do make will often be concentrated in principal residential properties. Unless you have a strong financial picture — and a good personal relationship with a bank — you may not be able to cash out regardless of how the title to the property is held.
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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