Decoding Mortgage Payment Schedules
QUESTION: I recently got a $135,000 second mortgage on my house. It is a 30-year, fixed-rate loan with an interest rate of 11%. We signed the documents on Nov. 20, and got our money on Nov. 27. We were given a choice of a payment due date, and we selected the fifth of the month. We were told that our first payment of $1,311.66 was due Dec. 5. Why should a full payment be due when we only had the money for nine days? Our loan officer wasn’t much help when we asked. --K. C.
ANSWER: Actually, the answer is quite simple. Mortgage interest is prepaid for the month. So, the payment you made on Dec. 5 was for the period between that date and Jan. 5. Your Jan. 5 payment is for the following month, and so on until the loan is paid off.
You might also check the terms of your loan. It is possible that you have 10 or 15 days after the due date in which to make the mortgage payment before being subject to a penalty charge.
This extension effectively allows you to split the month with your lender; you prepay two weeks interest and post-pay the other two. As you might imagine, lenders don’t like you to do this. Also, if you should ever accidentally miss the final payment date, you are subject to a substantial late charge. So, it makes sense to pay close attention to the terms of your agreement with your lender.
When to Write Off a Sour Investment
Q: I am one of the many unfortunate holders of unsecured debentures issued by American Continental, parent of Lincoln Savings. I invested $12,000 in the debentures and now that American Continental is in bankruptcy, I have little reason to believe that I will get my money back.
I know I can write the investment off on my taxes, but when? I am getting lots of conflicting opinions. Some say I can do it this year; others say I have to wait until the bankruptcy proceedings are completed. Help! --L. I. H.
A: Your plea is one we have been hearing often in recent months. So, our advice bears repeating.
Despite what you have heard, the Internal Revenue Service has no set rules on when you can declare a capital loss, which is what you have. The only guideline is that you can declare the loss when it can be “reasonably determined” that your investment is actually worthless.
Is that when bankruptcy proceedings are completed? Perhaps, but a bankruptcy does not even have to be filed for the determination to be made. You must only have reasonable and sufficient evidence to support your conclusion.
As we have said, this is a fine line that you unfortunate investors must walk because if you are overly pessimistic, the government can force you to refile your tax form and assess a penalty for your judgment error. And if you wait too long to make the assessment, you could lose the writeoff entirely because the IRS imposes a three-year statute of limitations on capital loss deductions.
That said, our tax advisers say taking the loss on American Continental debentures this year is probably a sound bet given the company’s current situation.
