Does a refi loan need private mortgage insurance?

DEAR BOB: I refinanced my condo last week. At the closing, I was informed by the lender that FHA requires PMI (private mortgage insurance) although I have 29 percent equity. Is there anything I can do to save the PMI monthly cost? The lender told me I am required to have it. But that sounds fishy. What recourse do I have? – Pandora M.

DEAR PANDORA: Please don’t confuse FHA’s required MIP (mortgage insurance premium) with PMI (private mortgage insurance), which conventional mortgage lenders usually require when the homeowner has less than 20 percent equity.

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All FHA mortgages must have MIP at their inception, regardless of the loan-to-value ratio. However, your lender should have disclosed when the premium can be removed, usually after 10 to 15 years. Frankly, the easiest way to get rid of FHA mortgage insurance is to refinance with a non-FHA mortgage.

DOG KENNEL PROVOKES RAGE

DEAR BOB: A few weeks ago you had a question from a condo owner who lives adjacent to a dog kennel with barking dogs. Didn’t she look out the window and listen before she bought the condo? It’s natural for dogs to bark. If she doesn’t like the barking, she should move rather than sue the dog kennel owner – Mattie W.

DEAR MATTIE: That dog kennel question and answer provoked lots of rage, both from dog lovers and dog haters. However, when a person buys a condo home near a noisy dog kennel, that buyer doesn’t have to tolerate the dog kennel owner who refuses to abate that nuisance.

The law of nuisances is clear that just because a property conforms to the zoning and is legally operated, the owner doesn’t have a right to continue a private or public nuisance.

Sometimes lawsuits are the only effective remedy to abate a nuisance, such as where those condo neighbors asked the kennel owner to enclose the cages or keep the barking dogs indoors at night, but the owner refused to cooperate.

ESTIMATING TAX ON RENTAL PROPERTY SALE ISN’T EASY

DEAR BOB: I recently sold my rental property. Now I need to estimate how much of the money I received I need to set aside for taxes. My selling price was $275,000, and my original cost was $150,000. Also, I made some capital improvements – Roger T.

DEAR ROGER: From your $275,000 gross selling price, subtract sales costs such as the realty sales commission and transfer fees. The result is your net or “adjusted sales price.”

To your $150,000 original purchase price, please add your capital improvement costs. Also add any purchase costs that were not tax deductible, such as transfer tax and title insurance. Then subtract your total depreciation deducted on your income tax returns during your years of ownership. The result is your “adjusted cost basis.”

From your adjusted sales price, then subtract the adjusted cost basis to arrive at your long-term capital gain.

Now it gets a bit complicated. The “recaptured depreciation” portion of your capital gain is taxed at a special 25 percent federal tax rate. But the balance of your capital gain is taxed at the new 15 percent federal tax rate. If the property is located in a state with an income tax, don’t forget the state income tax. For full details, please consult your tax adviser.

FHA HOME LOAN MIGHT HELP THESE HOMEOWNERS

DEAR BOB: My father and mother have two mortgages on their home at 8 percent and 12 percent interest. His personal business has much debt.No bank will refinance and consolidate these home mortgages at a reasonable interest rate. He has a SBA (Small Business Administration) loan with a personal guarantee. What is your advice? – David G.

DEAR DAVID: A possibility to consider is a FHA home loan. FHA often will finance home mortgages that conventional lenders won’t consider. Your parents should consult a mortgage lender who specializes in FHA home loans. A good place to look is their local phone book yellow pages under “real estate loans.”

PAYING MORTGAGE POINTS MAY BE BETTER THAN PAYING JUNK FEES

DEAR BOB: We are buying a new home. The builder offered to arrange the mortgage. The quoted lender fees total $874. They include $71 tax service fee, $250 underwriting fee, $450 application fee, $100 lender document preparation fee, $45 overnight courier fee, $780 hazard (fire) insurance fee, $420 settlement/closing fee, $50 document preparation fee, $327 lender’s title insurance, $660 owner’s title insurance, $125 recording fee, $50 notary fee, and $480 tax transfer fee. Which fees are legitimate and which are junk fees? – Cristine F.

DEAR CRISTINE: Those fees aren’t too bad. I’ve seen much worse. The $250 underwriting fee, $450 application fee and $100 lender document preparation fee are lender 100 percent pure-profit junk or garbage fees, which you can negotiate. The other fees appear to be legitimate fees paid to third parties for services provided.

However, there is no loan fee, usually called “points.” One point equals one percent of the mortgage amount borrowed. Depending on your mortgage amount, you might be better off paying a one-point loan fee (which is tax deductible on a home acquisition mortgage) rather than paying those nondeductible mortgage lender junk fees.

You should be aware if you are borrowing through a mortgage broker that mortgage broker might also be receiving a legal kickback from the actual lender. It’s called a yield spread premium if your loan interest rate is “above par” or the market interest rate.

Shop around among at least a half dozen other mortgage lenders to see if you can do better or if you have a good deal.

WHO PAID MORTGAGE PAYMENTS, NOT NAME ON THE MORTGAGE, MATTERS

DEAR BOB: My partner and I share the title to our home. But the mortgage is in my name alone and I receive the lender’s 1099 form. Can the deduction for the property tax and mortgage interest be shared? Can he take the property tax deduction in lieu of my deducting it so he can get an itemized deduction? – Jerry B.

DEAR JERRY: If you and your partner each own and live in the principal residence, and if you each paid the mortgage interest and property tax payments, you can each deduct on your personal tax returns the amounts you each actually paid.

The fact the lender sends the 1099 to you in your name alone is irrelevant. What matters is (1) both your names are on the title so you each are legally obligated to make the payments and (2) who actually paid the interest and property tax payments. Each co-owner can itemize their interest and property tax payments actually paid. For more details, please consult your tax adviser.

SHOULD ELDERLY PARENTS SELL RENTAL PROPERTY NOW?

DEAR BOB: Our elderly parents own a rental property, which is in their living trust. What are the tax consequences of selling the property now verses selling after one or both pass away? – Margaret W.

DEAR MARGARET: If your parents sell their rental property now, their capital gain will be taxable. However, if the property isn’t sold until after one dies, the survivor will get a fully or partially stepped-up basis to market value, thus reducing potential capital gains tax.

If the property is sold after both parents die, the heirs will receive a new basis stepped-up to market value on the date of the surviving parent’s date of death.

The fact the title is in a living trust has no effect on the tax situation. A living trust is just a title holding method, primarily to avoid probate costs and delays, as well as to provide property management if one or both of your parents become incompetent, such as with Alzheimer’s disease. For more details, you and they should consult your tax advisers.

WHERE TO GET CREDIT REPORT AND FICO SCORE

DEAR BOB: I have been in the market searching for a home to buy. I have also scouted around to compare home mortgage interest rates and terms. How does this affect my credit report score when these lenders check my credit report? Also, is a FHA mortgage better than a conventional mortgage? – Mr. L.B.

DEAR MR. L.B.: Too many credit inquiries can hurt your FICO (Fair Isaac and Co.) credit score. You can obtain your current credit report and FICO score at www.myfico.com. The cost is $12.95.

FHA home loan limits, which vary by locality, are lower than for conventional Fannie Mae and Freddie Mac “conforming loans” up to $333,700. However, FHA has more liberal loan qualification rules for borrowers who are rejected by other lenders. Please consult a local mortgage lender to review your personal borrowing circumstances.

The new Robert Bruss special report, “Today’s Five Best Real Estate Profit Opportunities,” is now available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet download at www.bobbruss.com. Questions for this column are welcome at either address.