Your Mortgage : Many Market Lenders Finance 90% Mortgages

Special to The Times

QUESTION: We live in a very expensive area where home prices seem outrageous. My husband and I have been saving like mad but only have about a 10% down payment. What is the maximum limit on a 90% mortgage?

ANSWER: There is no limit to 90% mortgages. Although Fannie Mae and Freddie Mac can't buy mortgages over $187,000, there are other secondary-mortgage market lenders who either originate or buy home loans with virtually unlimited amounts.

These so-called jumbo loans can be obtained from local S&Ls;, banks and mortgage brokers. Although these loans may seem expensive, they are better than the alternative of not buying a home.

Getting a big mortgage doesn't conflict with the suggestion that you pay off that mortgage as quickly as possible if you plan to stay in the home many years and want to save interest dollars by cutting the loan from 30 to 15 or 20 years. To find out the exact extra payment necessary to cut the mortgage term, ask your lender to supply a 15-year and 20-year payment amortization schedule.

'Get Largest Mortgage' Still the Best Advice

Q: Several times you recently said home buyers should obtain the largest mortgage they can get. I agree that because of the 1987 Tax Act, your advice makes sense. But doesn't this conflict with your advice to add an extra $50 or $100 to each mortgage payment to reduce the principal and cut the mortgage term?

A: No. Many home buyers make large down payments, thinking it is smart to reduce their monthly mortgage payment by a few dollars. Then they realize their big mistake but it's too late. Once a home acquisition mortgage is obtained, the home buyer has only 90 days to change his/her mind.

Tax-Deferred Exchange Way to Handle Profit

Q: We recently sold some land and earned about $44,000 profit. If we use this money to pay down our home mortgage can we avoid tax?

A: Nice try, but using your cash from the land sale to pay down your home mortgage won't avoid tax on the profit. You could have avoided tax by making an IRC 1031 tax-deferred exchange but it's too late now. Please consult your tax adviser for details.

Pay Home Loan Fee by Separate Check

Q: We are buying our first home. Our realtor advised us to pay the loan fee by separate check, so we can deduct it on our income tax returns. But the lender refused to let us do that and subtracted the loan fee from our mortgage proceeds. Can we deduct our loan fee on our tax returns anyway?

A: The official IRS position is that the loan fee for a mortgage to acquire a principal residence is tax deductible as itemized interest if "paid" from separate funds rather than being subtracted from loan proceeds.

You should have listened to your smart realtor and insisted that the lender allow you to pay the loan fee by separate check. Shame on that ill-informed lender who forced you to make a costly tax mistake. I've heard some aggressive taxpayers claim this deduction even if the lender subtracted the loan fee from the proceeds, but then they pray every day that they won't be audited by the IRS on this item.

Loan fees not paid by separate check on home acquisition loans and loan fees on all other types of realty loans are tax deductible over the life of the loan. Please consult your CPA for full details.

Child Can't Deduct Mom's Mortgage Cost

Q: For the last few years, I have been paying my disabled mother's mortgage payments, property taxes and insurance. A friend tells me I can deduct these expenses on my income tax returns, although I do not live in my mother's house. If true, these tax deductions would save me a bundle of income taxes since I rent an apartment and don't have enough tax deductions to itemize. Please clarify.

A: Your friend is mistaken. Since you are not the owner of the property and therefore are not obligated to pay the mortgage and property taxes, you are not entitled to deduct them on your tax returns.

However, if your mother is willing to add you as a co-owner of the residence and if you move into it as your personal residence, then you would become eligible to deduct the mortgage interest and property taxes you pay.

But there could be adverse tax consequences of doing so because if your mother is expected to die soon, you would probably be better off inheriting the home since you would then receive a stepped-up basis of its market value on the date of her death. Please discuss the pros and cons with your tax adviser.

Don't Use Inheritance on Mortgage Principal

Q: Several times recently you have advised homeowners to make extra principal payments of $100 or so each month on their mortgage payments to cut the length of their mortgage by several years. My husband recently inherited almost $15,000 and we are considering using it to pay down our 8.25% interest-rate mortgage, which has a balance of almost $34,000. Do you think we should do this?

A: No. Making a lump sum prepayment on a low interest rate home loan is not a smart idea. There are several reasons. Your monthly mortgage payment will not be reduced, and since your mortgage interest rate is low, you will never again be able to borrow money so cheaply.

You would be tying up cash which you might need for emergencies or investments. By paying down a low-cost loan, you would really be investing that $15,000 at 8.25 percent interest. That is a very poor investment.

The only advantage of making a lump-sum payment on a low-interest-rate mortgage is you will cut the life of the mortgage and save some interest. However, saving interest at 8.25 percent is not a smart move. Instead, I suggest you invest that $15,000. Surely you can earn more than 8.25 percent interest on it.

You Don't Have to Pay Off Loan Before Selling

Q: A few years ago, we refinanced our mortgage with a new VA loan. My husband died last year and I have decided to sell my home and move to a better climate. I talked to a realtor and she says I don't have to pay off my mortgage before selling. This doesn't seem right to me that I can sell with my mortgage unpaid. How does this work?

A: Presuming your VA mortgage was created before 1988, there is no need to pay it off before selling your home. The buyer can either assume it or obtain another mortgage which will be used to pay off your old VA loan.

Having an assumable mortgage is a major advantage if it has an attractive interest rate. However, if the buyer assumes your VA mortgage, be sure the lender releases you from further liability.

Then, if the buyer defaults, you won't have to worry about a deficiency loss against you. Ask your attorney to explain further.

Questions and comments may be sent to the Real Estate Editor, Los Angeles Times, Times Mirror Square, Los Angeles 90053.

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