Your Mortgage : Pay-Down Has No Effect on Profit
QUESTION: We paid about $52,500 for our home many years ago. It is now worth several times that amount. Our no down payment VA mortgage is now only about $14,325. How does this mortgage affect our profit when we sell our home?
ANSWER: Your mortgage has nothing to do with your home sale profit calculation. The profit will be the difference between your home’s adjustable (net) sales price after paying selling costs and your adjusted cost basis, usually your purchase price plus capital improvements added during ownership.
To illustrate, suppose your home sells for a net sales price of $150,000. Imagine, while you lived in your home you spent $20,000 for capital improvements, bringing your adjusted cost basis up to $72,500. Subtracting this amount from the $150,000 adjusted or net sales price produces a $77,500 profit in this example. As you can see, the mortgage pay-down is irrelevant. Ask your tax adviser to explain further.
When Home Mortgage Is Tax-Deductible
Q: In 1989, we bought our first home. Since I have a credit problem, we did not assume the VA mortgage, but purchased “subject to” it. As we are not legally obligated to pay the mortgage, are we still entitled to deduct the mortgage interest?
A: Yes. To be entitled to deduct mortgage interest, you do not have to be legally obligated to pay the loan. However, you must be either the legal or equitable owner of the property. Since you presumably have title to your home, you are the legal owner and entitled to the mortgage interest deduction.
An example of an equitable owner is a buyer under a land contract, also known as a contract for deed, contract of sale, agreement for sale and installment land sale contract, where the seller retains the legal title until the buyer makes all, or an agreed number of payments, before receiving the deed. Please consult your tax adviser for further details.
Making Profits From Discount Mortgages
Q: Last weekend at a wedding reception, I talked with my cousin who invests in discounted mortgages. She has been doing this for the last few years and says she earns between at least 15% and 25% on her money. If I understood correctly, she says she buys low-interest-rate first or second mortgages from individuals for as much as a 50% discount from the balance owed by the borrower. Is this legal? If so, how can I learn more about this investment?
A: Yes, investing in discounted mortgages is perfectly legal and it can be as profitable as your cousin says. The idea is to buy an existing mortgage for less than its balance, thus raising its yield to you. But the borrower continues paying the agreed interest rate and is not affected by the sale of the mortgage. The best book on how to make big profits from discounted mortgages is “Invest in Debt” by Jimmy Napier. It is available for $12 from Jim Napier Inc., P.O. Box F, Chipley, Fla. 32428.
The second best book is “The Number One Real Estate Investment No One Talks About” by Sanford W. Hornwood and I. Lucretia Hollingsworth, recently published in paperback by Prentice Hall and available in stock or by special order from local bookstores.
When Discrimination on Loans Is Legal
Q: My wife and I want to buy a home. The problem is we are both retired, living on Social Security and pensions. However, we have almost $100,000 in savings. We found a modest home to buy. But the mortgage company recommended by the realtor turned us down for the loan. We were told we had inadequate income.
When I pointed out we can dip into our savings, if necessary, to make the mortgage payments, the loan officer said she couldn’t consider that. Since I am 72 and my wife is 68, I think we were discriminated against because of our ages, don’t you?
A: No. Although it is illegal for mortgage lenders to discriminate on the basis of race, sex, national origin or age, I doubt those were the reasons your loan was “declined.” Rather, I think it was due to inadequate income.
Most lenders love elderly borrowers because senior citizens rarely default on their mortgages. However, the lender would not be doing you a favor if you can’t afford the monthly payments from your current income. While it is nice to have that $100,000 in savings, it won’t last long if you must dip into it to make the mortgage payments.
