Your Mortgage : Discounted Mortgages Are High Yield
QUESTION: As a retiree with lots of time on my hands, I think discounted mortgages with yields of 20% or higher would be the perfect investment for me. I am no longer interested in owning real estate and dealing with tenants.
However, I wonder how the usury laws apply to these mortgages? Also, where can I buy these mortgages?
ANSWER: Discounted mortgages are the ideal high-yield investment for retirees who want to actively manage their portfolios. I recall a family friend who continued to invest in second mortgages almost until the day he died at age 85.
If the mortgage was not usurious when the loan was originated, it does not violate the state usury law when it is sold to an investor such as you at a discount.
For example, suppose I sold my home and carried back a second mortgage for the buyer at 8% interest, which does not violate state usury laws. But because I need cash, I agree to sell this mortgage to you at a discount that will yield 20% on your invested dollars. Since the borrower continues making regular monthly payments at 8% interest, there is no usury law violation even in states with low usury limits.
Open-End Mortgage Principle Explained
Q: A friend at work recently obtained an open-end mortgage. She says this is a good deal because when her house appreciates in market value she can then borrow more money on her first mortgage without the usual costs of refinancing. What do you think?
A: An open-end home mortgage means the loan balance can be increased if the residence continues to increase in market value. Such mortgages usually allow for periodic increases in the loan amount, based on increased property values in the vicinity. This concept can save on refinancing costs, but some lenders making open-end mortgages charge higher than market-interest rates for this extra feature.
How to Handle Loan Refinance Deduction
Q: I am thinking of refinancing the mortgages on our home and on our vacation home. My goal is to lower the interest rates. But I know there will be loan fees to pay. Can these costs be deducted on our income tax returns?
A: Yes, the loan fees you pay to refinance the mortgage on your principal residence and your vacation home can be deducted on your income tax return. However, they must be amortized (deducted) over the life of the mortgage you obtain. They cannot be fully deducted in the year you obtain the refinanced loans.
To illustrate, suppose you pay a $1,000 loan fee to obtain a 30-year mortgage. You will be able to deduct $33.33 each year for the next 30 years. Ask your tax adviser to explain further.
