Ask Realty Times - October 8, 2004 - 10/8/2004 - Mortgage Loan Refinance Debt Equity

Ask Realty Times - October 8, 2004
by Peter G. Miller

Answer: Generally you can write off up to $250,000 ($500,000) in capital gains on the sale of your prime residence if you have lived in the property for two of the past five years. However, the IRS has published rules which say that under certain conditions you may be able to write off some of your gain even if you move earlier. One of those rules says that if you move at least 50 miles to find new employment then you can qualify for some capital gains benefit.

How much can you claim? You lived in the property 90 days (approx.) and two years would have 730 days for tax purposes. In essence you could shelter about 12.5 percent of your profit from capital gains taxes. For specifics, please speak with a tax professional.

However, a better choice might be find to more employment, rent rooms, or do whatever it takes and stay. You're making as much as $11,000 a month in real estate equity -- hardly a bad result.

Question: I bought a house with my boyfriend. We are no longer together, and, many years later, I am looking into buying a home for myself. I recently learned that my former boyfriend has missed payments and the bank is threatening to foreclose, thus plummeting my credit rating. Do I have any rights in this matter? I have tried repeatedly to get him to refinance or sell so that my name can come off the loan, but he won't. What can I do?

Answer: Speak with an attorney to determine your rights. Ask about a suit for partition to see if you can force a sale or the purchase of your interest. In either case, the current mortgage would come to an end and you would no longer be on either the title or the loan.

On the matter of credit, as a loan co-signer you are fully responsible for complete repayment of the debt as well as all monthly payments. That said, if you need a mortgage you should ask underwriters for the opportunity to provide an explanation of your circumstances. If your credit is otherwise strong, you might find a sympathetic ear.

Question: What's a 10/30 interest-only LIBOR loan? Currently I have a 3/1 ARM at 4.25 percent. I have $310,000 left on our mortgage and our home is valued at approximately $420,000.

Answer: Interest-only loans need to be viewed with care and caution. In this case you have a loan which is interest-only for the first 10 years. Since the loan balance is not being paid down, the monthly cost is lower than with a self-amortizing loan.

However, interest-only does not always mean cheap. While the LIBOR (London Interbank Offering Rate) is low today, it's an index for an adjustable-rate mortgage and can rise -- thus wiping out the advantage of interest-only payments.

Also, you need to look ahead. Let's say the interest rate today is 4 percent and you borrow $200,000. Without amortization, your monthly payment for an interest-only loan would be $667. Taxes and insurance are extra.

After 10 years you will still owe the original $200,000 loan amount but you will have to re-pay the debt in 20 years. Let's say that the fixed interest-rate in 10 years is 6 percent. If only 20 years remain for re-payment, with the same loan amount the monthly cost would increase to $1,433. Of course, if the interest rate in a decade rose to 8 percent the monthly cost would be $1,673. Will you be able to afford such monthly cost increases?

In a decade rates could fall and your earnings could increase -- or rates could rise and perhaps your income would stay the same or even fall. As well, in a decade you might be able to refinance, assuming you qualify.

Given today's low fixed rates, why not consider a self-amortizing fixed-rate loan? Yes, you would pay more per month but each month you would reduce your debt and there would be no worries about rising rates in the future.

The counter-argument is to get an interest-only loan and not worry about what may happen 10 years down the road? Why? Because if all goes right the home will have appreciated to such a point that you can simply sell at a profit and pay off the loan.

The past decade has shown that this is not an argument to ignore. However, past trends do not guarantee future results because things don't always "go right."

Question: We had a lien against a property and foreclosed. We told our lawyer we didn't want this property, but he insisted we had to bid $20,000 on it to show other prospective buyers it could be sold. During the auction, a daughter of the former property owner went around telling all that it had toxic waste on it, and that the cleanup would be very expensive. The other buyers declined to bid. We won.

Given the daughter's behavior shouldn't my lawyer have stopped the auction and then set up another sale date?

Answer: Your attorney protected your interests. Had you not made a bid, someone else might have offered far less for the property -- thereby gaining title and paying off your note at a fraction of its value.

As to the daughter's remarks, you might want to ask your attorney about such concepts as tortuous interference, restraining orders and slander.

Your next step is to hire an experienced broker to market the property.

Question: What fees are the buyer typically expected to pay and what fees are negotiable between buyer and seller? The seller would like for me to pay half of the title and escrow fees. Is this reasonable?

Answer: Real estate negotiation is a contest of sorts. Who pays what is first established in many cases by local custom, however both parties may be able to negotiate, depending on market conditions. Reason and fairness often have very little do with the answer.

For instance, in a strong seller's market you can bet that the buyer will pay a lengthy list of fees and charges. In a buyer's market, the seller will graciously offer to pay. In a market with more balance, both parties might pay some of the bill.

But let's say that you're required to pay half the title and escrow fees. You might say that you'll only buy the property if there's also a "seller contribution" equal to 3 percent (or whatever percentage) of the sale price. Now for purposes of the agreement you will pay half of those pesky title and escrow fees -- but you'll also get a substantial assist at closing from the owner.

So the real answer is this: Who has leverage? Who bargains better?

Question: We're purchasing a home that has been rented on a month-to-month basis. We are having a difficult time with the tenant moving out. What can we do to speed up his vacating the house ... no one seems to know?

Answer: This need not have been your problem. When purchasing investment real estate if you do not want the tenants to remain on the property you must first look at the lease. Does the lease give owners the right to take back the property? When? With a month-to-month lease tenants would typically be entitled to 30 days notice, more if possible.

Thus in making your offer it could have required that the property be vacated 24 hours before closing, assuming closing provides time for sufficient tenant notice, so that you can have an unobstructed walk-through before settlement. By requiring an empty property you would be forcing the sellers -- not you -- to move the tenants. Speak with your broker or attorney for proper language -- and be sure to inquire about such issues as how the tenant deposit should be handled, damages, and rent control rules -- if any.

This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought.