DEAR BENNY: I was reading in one of your columns about paying off your mortgage faster by making an extra payment each year. You said to make sure your coupon clearly indicates you are making an extra payment. I did this at the end of 2008, but didn’t know whether it should go under an extra payment or payment on the principal. I paid it on the principal because otherwise it wouldn’t show up until January as a payment.
I called the mortgage company and could not get a straight answer from them. I was told I could do it either way, which was not helpful. Did I do the right thing by paying the extra payment on the principal? I was setting up our payments to come out of our checking bimonthly so the extra payment would be included each year. We also have money going into our escrow account to pay our taxes and homeowners insurance. I am confused. –Lynette
DEAR LYNETTE: I am also a little confused about your question, but let me try to answer it this way. I always recommend that if you can make at least one extra monthly payment each year, you can lower the amount of interest you will ultimately pay as well as shorten the term of the loan. For example, one additional monthly payment per year should reduce a 30-year loan down to approximately 22 years.
You can make this extra payment in several ways. In December of each year, you can make that extra payment. Or, better yet, divide the monthly payment by 12 and add that amount to your payment each and every month.
I recommend that you call it "extra payment" and include it in your coupon as an "extra payment." To be on the safe side, I also would include the amount as a note on the bottom on your check, and again call it "extra payment." If you are using an automatic payment account, instruct the organization paying the loan to make sure they label the extra payment as such.
And in January of each year, do your own calculations to make sure that these extra payments have, in fact, been included in your new mortgage loan balance.
DEAR BENNY: My wife and I (via our LLC) own a two-story brick building built in 1890. We are eight years into a 15-year fixed-rate mortgage with payments of $816 monthly, and the balance is $42,000 balance. We have a successful business, which my wife operates, on the first floor.
For the last several years there has been a successful historic renovation of our downtown. Many of the second-story lofts have been or are being renovated into urban living spaces. Our second-story loft has 1,800 square feet and 11-foot ceilings with 8-foot windows, but has been bricked up since the 1950s. We are considering moving forward with a renovation, but we must borrow to complete this work. Our economy has experienced a downturn recently and our county currently has a 10 percent unemployment rate. I am uncertain if we should continue under these circumstances and if we do, is it wise to refinance the total building or extend our HELOC?
We are debt-free (except for our home and business mortgage), own four small businesses, have no children, own other free-and-clear rentals, and we have a six-month reserve on hand in the bank. I have proposed a budget of about $100,000 to complete this work, and other downtown rentals are running at about $1,100. What advice can you offer given the current economic situation and our borrowing needs? I do feel confident that given a 90 percent occupancy rate we can accomplish a slightly positive cash flow over our PITI. –Michael
DEAR MICHAEL: I always appreciate hearing positive things from my readers. You have asked the $100,000 question, but I can provide only general information. Only you can make the final decision. Since you wrote this question to me, (a few months ago) the economy has not gotten better, and indeed it has declined further. Perhaps the new Obama administration will create hope and optimism similar to Camelot when John Kennedy became president back in 1960.
You indicate that the unemployment rate in your county is quite high, but you will need a 90 percent occupancy rate to make a profit. What guarantee do you have that you will reach that goal? Keep in mind that being a landlord means you will have vacancies.
Have you lined up any potential tenants, and checked out their financial and credit ratings? That’s the first thing I would do before launching in the project.
Only you can make the final decision. However, if it were up to me, I would hold off at least until we see some signs of an economic recovery. You can always do this later, but if you fail now, you could lose the building.
DEAR BENNY: In June 2007, I purchased a house with a fixed-rate mortgage. A year later, the mortgage company requested an extra payment of $715. Six months later, they sent me another bill, claiming an extra payment was required.
I am being told that a mistake was made on the original amount needed for insurance and taxes, and they cannot be sure if or when additional extra payments will be required. And nobody seems sure whether I will be allowed to take over payment of my own insurance and taxes, which I’ve always done in the past.
Since I’m not a first-time homebuyer and have excellent credit and have managed house insurance and taxes in the past, this all seems highly weird. –Willi
DEAR WILLI: I personally dislike the concept of having to pay money monthly into an escrow fund managed by a lender to pay real estate taxes and insurance. However, it is legal and most lenders (especially FHA and VA) require this.
My objections are twofold. First, most lenders use this money as collateral and do not pay any interest on it. Second, lenders sell/assign loans all over the country, and often a lender in one state does not know where or how to pay the real estate tax in your particular county.
But whether you are a first-time homebuyer or have good credit, if you want the loan you have to comply with the lender’s requirements.
You should obtain and carefully review the lender’s financial records regarding your loan. Find out the costs of your tax and insurance, and compare those costs to what the lender has been charging — and paying. By law, lenders have the right to a two-month cushion, just in case you miss a mortgage payment.
Finally, I recommend that every borrower who escrows for taxes and insurance send a demand letter once a year (or twice a year if real estate taxes are paid every six months) requesting proof that your lender did, in fact, make the required payments. This is especially true in today’s market economy, when many mortgage lenders are no longer in business.
DEAR BENNY: My mother recently applied for a reverse mortgage. I have been trying to find a benchmark for reasonable costs associated with this loan to no avail. Could you please guide me in the right direction? –Peter
DEAR PETER: Congress recently enacted a law putting a maximum limit of $6,000 on closing costs for federally insured reverse mortgages. But different lenders will have different costs. I recommend that you do a search for "Reverse Mortgage" at your favorite Internet search engine. Specifically, AARP has a lot of helpful information, which can be found at www.aarp.org.
DEAR BENNY: I have an investment property I would like to use in a 1031 tax-deferred exchange. I have great credit scores (770), but my debt ratio will not allow me to qualify for a loan on the new property. I currently own the current investment property in my own name.
I now have a significant other in my life. Can he go on the new loan and title work, allowing me to take advantage of the 1031 tax exchange rules and qualify? We plan on the new property being our retirement home eventually. –Kathy
DEAR KATHY: It all depends on the price of the properties. Your current property is the relinquished property and the new one is called the replacement property. Since you own the relinquished property by yourself, the replacement property must also be in your name only. However, let’s take this example. The relinquished property will be sold for $500,000, and the replacement property will cost $750,000. If you and your significant other take title to the replacement property as tenants in common, with your interest equaling two-thirds (i.e. $500,000), I believe this would fly through the Internal Revenue Service. But confirm this with your own tax and legal advisors.
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 benny@sandbox.inman.com.
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