Here Are Some Tips on Avoiding Problems With Second Mortgages

QUESTION: I think I was ripped off by a major savings and loan. We “locked in” a 10.75% interest rate. When we filled out the loan application we clearly showed that we were making a 10% cash down payment; the seller was giving us a 10% second mortgage, and we wanted an 80% first mortgage. But when the loan papers were prepared we were charged 11.25%. The loan officer said this was because we have a second mortgage. We signed the papers under protest. Do you think we should complain?

ANSWER: Yes. There is no valid reason for a first mortgage lender to charge a higher interest rate because the borrower is also obtaining a second mortgage. Most lenders do not charge a higher interest rate when a second mortgage is involved.

Having a second mortgage actually makes the first loan safer. The reason is that both the borrower and the second-mortgage lender are interested in keeping payments on the first loan current. If the borrower defaults, the second-mortgage lender often makes the payments on the first loan to avoid being wiped out by foreclosure by the first lender.

I suggest you write to the president of the S&L;, explain that the loan officer knew you were getting a second mortgage but did not mention a higher interest rate. Depending on the amount of your loan, a one-half percent difference in the interest rate can amount to thousands of dollars over the 30-year life of your loan. Don’t give up.

Don’t Count on Rising Value to Pay ‘Balloon’

Q: We are struggling to buy a home. But the realty agent found us a home that we can buy for 10% cash down payment, assume the existing first mortgage, and the seller will loan us the balance on a second mortgage. However, the seller wants a balloon payment in just two years. Although homes have been going up nicely in value in our town, I am worried that we won’t be able to refinance in two years to pay the balloon. Should we take a chance?

A: I do not recommend taking a balloon payment due in less than five years. You would be taking a major risk of not being able to refinance in two years for enough cash to pay off the balloon payment. If you don’t pay off the balloon payment when it’s due, you would either lose the house or have to sell it. But you will sleep much better if you negotiate with the seller to get her to carry that second mortgage for at least five years.

Needs More Time for Replacement House

Q: I need an extension for the 24-month period for buying a replacement home. In April, 1987, I sold my home and made about $45,000 profit. But due to business reverses since then, I do not have the money now to buy a replacement home so I can avoid paying tax on my profit. I phoned the IRS but was told that there is no way to get a hardship extension. I also called my congressman’s office and he couldn’t help. What should I do, because I can neither afford to buy a home nor can I afford to pay tax and interest on my $45,000 profit?

A: Sorry, but you cannot get an extension beyond 24 months to buy your replacement principal residence of equal or greater cost so that you can defer the profit tax. Internal Revenue Code 1034 contains no provisions for extension for hardship unless you move out of the country or join the military.

However, you can probably buy a home for little or no cash. All that matters is that you must own and occupy your replacement home within 24 months after selling your old residence. There is no requirement that you invest even $1 from the home you sold into the replacement home. If qualified, you can buy a replacement home for nothing down with a VA mortgage and still claim the tax deferral. Consult your tax adviser on further details on the tax aspects of the home purchase.

Can’t Get Deductions If House Is Not Yours

Q: I moved into my mother’s home to care for her last year. Since I am financially well off I made her mortgage payments after she became unable to work. Can I deduct the mortgage interest and property taxes I paid? I do not own my own home.

A: Unless you are legally obligated to pay the loan payments and the real estate taxes, you cannot deduct them on your personal income tax returns. However, if your mother adds your name to the home’s title, you would become entitled to the deductions after the date you acquire an interest in the house. Consult your tax adviser for details.

Reinspect Home Just Before Sale Closes

Q: I am a real estate broker and I can’t recall your ever discussing the topic of buyers reinspecting homes just before the sale closes. My speciality is listing homes for sale, so I rarely work with buyers who are usually brought to my homes by other realty agents. However, I am shocked by about 75% of the agents who don’t even suggest that their buyers reinspect the home shortly before the sale to be certain the seller left everything as agreed in good condition. I suggest reinspections because I don’t want to be sued if the buyer isn’t satisfied. Any idea why all agents don’t encourage buyers to reinspect before closing, or do you think I am being paranoid?

A: Congratulations on raising a topic near and dear to my heart. As a buyer of rental houses, I find it curious why agents often resent my request to reinspect the house just before the sale closing date. I suppose it is because they fear that everything will not be in good condition, or that the seller will have removed items to be included in the sale.

The home buyer has maximum leverage over the seller before the sale closes. At this time the seller will do anything reasonable to get the sale closed. But after the seller has received the cash and left town, it is virtually impossible to get any problem corrected.

Must Home Sale Cash Purchase New Home?

Q: I am receiving conflicting advice. We want to sell our townhouse and buy a single-family detached house. The real estate agent says we must reinvest all the cash from our sale into the replacement home if we are to defer the tax on our profit, which will be about $30,000. But our tax preparer at H&R; Block says all that matters is that we buy a replacement home within 24 months that costs at least as much as our net sales price for the townhouse. Who is right?

A: Your tax preparer is right. Your realty agent is wrong. Internal Revenue Code Section 1034 allows you to defer your profit tax when you sell your principal residence and buy a replacement principal residence of equal or greater cost within 24 months before or after the sale.

You need not reinvest even $1 from the sale into the replacement home. For example, you can sell your old home for cash, pay off its mortgage, spend the tax deferred cash as you please, and buy your qualifying new home for nothing down, such as with a VA mortgage, which requires no down payment.

Time-Shares Not Real Estate Investments

Q: We are considering buying a time-share vacation condo in Florida. What do you think of time-share real estate investments?

A: Not much. Time-shares are not real estate investments. Rather, they are advance purchases of vacations. I have yet to hear of anyone who has made a decent cash profit on the resale of a time-share (except the developer). My recommendation is to spend only money you can afford to lose on a vacation time-share purchase.