Adjustable Mortgage Rate Interest Can Differ, Depending on Index

QUESTION: I am a puzzled real estate broker. What is going on in the upside-down mortgage market? In our town, fixed-rate mortgages are a little over 11%, whereas adjustable-rate mortgages, after the initial six-month teaser rate around 9%, jump to almost 11%. I thought adjustables were supposed to be cheaper than fixed-rate mortgages, but that doesn’t seem to be happening. Also, most of my home buyers who took adjustables preferred the cost of funds index, but now all that seems to be available are adjustables tied to the volatile Treasury bill index.

ANSWER: As you know, local savings and loans, banks and mortgage brokers have been selling most of the mortgages they originate to the secondary mortgage market, such as Fannie Mae and Freddie Mac. But, in the last few months, these major buyers have discovered the cost of funds index is moving very slowly upward, whereas the Treasury bill index changes much faster to reflect rising interest rates.

For example, in the last year the cost of funds index has risen only about 0.5% whereas the Treasury bill index has gone up around 3%. Adjustable-rate mortgage borrowers with loans tied to the cost of funds index (as I have been recommending) need not worry about massive monthly payment increases. But, ARM borrowers whose loans are tied to Treasury bill indexes are often shocked to receive big payment increases.

The result is that lenders have suddenly switched from originating ARMs tied to the cost of funds index to ARMs tied to the faster rising Treasury bill indexed loans.

To complicate matters, a few adventurous ARM lenders now offer loans tied to the LIBOR index, the London interbank rate, which has nothing to do with U.S. interest rates and is not understandable to most borrowers.

Should Option on Land Be Recorded?

Q: I have an opportunity to buy an option on land that I think I can get rezoned for a shopping center. The option price is only $5,000. Do you think I should record the option?

A: Yes. Since you are not living on the property, an unscrupulous owner might sell to another buyer who would not have to honor your option if he was not aware of it. Recording the option, or a memorandum of it, gives constructive notice of your option rights to anyone dealing with that property. Ask your attorney to explain further.

Personal Property in Sale Should Be Listed

Q: At a Sunday open house, the realty agent handed us a listing information sheet about the home. It said stove, refrigerator, washer, dryer, barbecue and drapes were included. After some heated negotiation, we bought the house. But, when we received the keys we were shocked to discover the house was stripped bare. The realty agent refuses to help us get the items we thought were included because they weren’t listed on the purchase contract that we signed. However, we presumed they were included since they were on the information sheet. Do you think we are entitled to these items?

A: Yes. Shame on that realty agent for failing to be certain that the personal property items on the information sheet were not listed on the sales contract.

The general rule is that a real estate sale does not include personal property on the premises. From a strictly contractual viewpoint, the seller was correct in removing the personal property because it was not included in the sales agreement. However, as novice buyers, you were relying on the truth of the information sheet and the honesty of the agent to deliver what was promised.

I suggest you try to settle the matter with the agent’s broker, but if that is not possible, don’t hesitate to go to court. Consult a real estate attorney for further details.

Ask the Right Questions When Buying a Home

Q: My husband and I want to buy a home in an elegant, established neighborhood where the schools are top quality. However, the homes are about 30 years old and some have serious problems, such as the need for new plumbing and faulty additions built without permits. What is the best way to avoid being “taken” by the seller and the realty agent?

A: Just ask the right questions of the seller or the realty agent. My favorite is: “What are the drawbacks of this house?” To be absolutely certain you have been told about any defects, when you make a written purchase offer, make sure it includes a phrase such as: “Seller warrants all material defects in this property have been disclosed in writing to the buyer.” If the seller or agent failed to disclose a problem, then you have a basis for legal action later. Please consult your attorney for further details.

Home Seller Should Limit Repair Costs

Q: I am trying to sell my home, but my real estate agent isn’t much help, so I am turning to you for advice. Our home is in an out-of-the-way location and is rather unusual, so it is not easy to sell.

It has been listed for sale two months and we have only received one low-ball offer, which we rejected without a counteroffer. However, that offer said the buyer wanted a professional inspection. We had no objections to that. But the offer also said the seller agreed to pay for any necessary repairs.

Naturally, we objected to that. If we receive a similar offer with such an inspection clause, how can we protect against unlimited liability?

A: That’s easy. In your acceptance of the purchase offer, just add a clause such as: “Seller to pay for any necessary repairs to the premises recommended by the professional inspector up to $1,000.” Ask your attorney for further details.

Should Home Seller Let Buyer Make Repairs?

Q: We must sell our home due to financial problems. The agent with whom we plan to list our home recommends we paint and fix up our home. Frankly, we don’t have the money or the time to do the work. However, if necessary, we could borrow the $1,500 we need. I think we should give the buyer a credit for the work, but my husband thinks we should borrow the money. What do you recommend?

A: Please listen to your husband. Getting your home into tiptop condition before putting on the market for sale could be the smartest investment you ever made.

Paint is by far the cheapest and most profitable improvement you can make. Cleaning and repairing are other valuable home improvements. Most home buyers have little imagination. If you don’t fix up your home before selling, it will appeal only to the bargain hunters like me.

Small Down Payment Advantages Outlined

Q: I think you are wrong to tell home buyers to get the biggest available mortgage and to make the smallest possible cash down payment. If people encounter financial difficulties, then they have a large monthly mortgage payment and they will probably lose the house. A better idea is to make at least a 25% cash down payment, so they can reduce the monthly mortgage payment and minimize the risk of loss if times get tough. Why don’t you rethink your advice?

A: There are several sound reasons that home buyers, even those who can afford a large cash down payment, should obtain the largest available mortgage and make the smallest possible down payment: Uncle Sam allows home mortgage interest deductions only on acquisition mortgages plus up to a $100,000 home equity loan; if the home appreciates in market value, the owner’s yield per dollar invested will be maximized with a small down payment; if the owner encounters financial difficulty the home can be sold whether it has a large or small mortgage, and if the home has a large assumable mortgage it will be easier to sell.

A mortgage is really a forced savings account. Most home owners need the discipline of a mortgage payment. They would probably waste any slight monthly payment savings if they made a large down payment.

To illustrate, suppose one home buyer purchases a $100,000 home with a $10,000 down payment and a $90,000 mortgage at 10.5% interest. The monthly payment on a 30-year loan is $823.25. However, if another home buyer pays $25,000 down and obtains a $75,000 mortgage at 10.5% interest, the monthly payment on a 30-year loan is $686.05. That is only a $137.55 lower monthly payment, but the second buyer tied up an extra $15,000 cash.

Uninsured Losses May Be Tax Deductible

Q: A severe storm damaged the roof of our home. Although I think our homeowner’s insurance company was wrong to deny our claim, and we are now suing them, we did not receive any insurance payment. Can we deduct our loss of about $4,500 for repair costs on our income tax returns?

A: Probably. If your loss was “sudden, unexpected or unusual” you qualify for the casualty loss tax deduction if the loss was more than 10% of your adjusted gross income. Other examples of casualty loss deductions include uninsured losses due to fires, floods, earthquakes, thefts and wind storms.

Know Risk of Buying With Zoning Limits

Q: We are considering buying a two-family duplex on a lot zoned for single-family homes. This is called a “nonconforming use.” The realty agent says if we should have a fire, the city will allow us to build only a single-family house. Do you think this should stop us from buying the duplex, which we like very much?

A: If you understand the risk of buying a nonconforming use property, I see no reason why you should not purchase that duplex. However, your offer should consider the diminished property value due to the zoning problem. If a fire should damage or destroy the duplex, rebuilding with a single-family house might be an advantage because such properties usually appreciate much better in market value than do small rental properties.

Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to the Real Estate Section, Los Angeles Times, Times Mirror Square, Los Angeles 90053.