Extra Loan Payments Bring More Profit

QUESTION: My wife and I are both 23 years young. A year and a half ago we purchased a townhouse with a 30-year mortgage. We are thinking of moving in about three years. Would you consider it wise to accelerate payments in this case? In the event of a sale, would my wife and I accrue profits reflecting these additional “principal only” payments?

ANSWER: I don’t have the sort of crystal ball that can tell me whether you are going to have any profit in the sale of this townhouse or not. After all, we’re looking about three years into the future. But we can work out a “what if?” scenario that might help.

Let’s say that you have a 30-year, $50,000 mortgage on your townhouse at 10% that calls for monthly payments of $438.79 (principal and interest only). Down the street, your neighbors, the Hatfields, have exactly the same mortgage. The difference is that, with the first payment, you started adding $100 extra to your monthly payment to principal. Not so with the Hatfields.

After five years (you’ve been there a year and a half and are planning to spend another three, so that’s close enough), you sell--as do the Hatfields. How much “profit” either of you end up with is determined by subtracting from the sales price your selling expenses and how much you still owe your lender, right?

Let’s say that both your townhouse and the Hatfields’ have appreciated to $60,000 and sell for that. Ignoring the selling costs, the Hatfields will walk away with $11,714 because they still owe their lender $48,286 of the original $50,000 loan.

And you? You’ll walk away with $19,457 because you only owe your lender $40,543. That makes you $7,743 better off than the Hatfields in just five years--during which time you will also have paid your lender $1,744 less in interest than the Hatfields have.

Is Loan Legal Debt If Appraisal Inflated?

Q: A builder tells me a townhouse is worth $80,000 and the appraiser agrees. The lender follows suit, and the government guarantees a loan based on that figure, and I’ve got the house. Two years later, I must move to keep my job and discover the house may sell, at best, for $60,000. Have I been defrauded?

Let’s assume that the builder, lender and appraiser have all been in cahoots to milk the S&L;, and the government people are shorthanded and pressured by congressmen to go along. Is the deficiency still a legal debt?

A: What you suspect may have some basis in fact. A large part of the trouble that the government finds itself in today is based, sure enough, on grossly inflated appraisals and lenders using those inflated appraisals to stick the government (through its guaranty programs) with foreclosed property worth, in reality, only a fraction of the appraisals.

In most of the cases that have been documented, of course, the skulduggery has involved large industrial properties and/or raw land intended for development, not individual homes or townhouses.

Proving it, alas, is a little bit like proving that the family cat has gotten into the fresh cream simply because it has cream on its whiskers and is burping. Especially in areas where, sure enough, real estate prices have plummeted.

Appraisers, lenders and everyone else concerned can dodge blame by laying it on the economy itself. It’s almost impossible to prove otherwise.

Is the deficiency still a legal debt? If it’s an FHA loan (which I assume it is), it is, unless you have received a release from liability from that agency or, even at this late date, can obtain one. The other possible escape hatch: Persuade the lender to take back the deed in lieu of foreclosure. Lenders are more inclined to go along with this in cases where (as in your instance) your job requires a move that leaves you little choice but to abandon the townhouse. It’s worth a try.

AVERAGE RATES FOR RESIDENTIAL MORTGAGES

Average rates for residential mortgages as of July 6, 1990.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.89% 10.13% 10.02% 8.38% 8.66% California 10.15 10.37 10.27 8.58 8.53 Connecticut 9.96 10.18 10.09 8.48 8.69 Wash. D.C. 9.76 10.01 9.90 8.16 8.50 Florida 9.90 10.15 10.03 8.34 8.40 Mass. 9.91 10.14 10.03 8.64 8.90 New Jersey 9.86 10.10 10.00 8.26 8.69 N.Y. Metro 9.96 10.20 10.10 8.43 8.76 New York 10.08 10.32 10.21 8.56 8.86 N.Y. Co-ops 10.39 10.49 10.47 8.65 8.93 Pa. 9.58 9.88 9.74 8.05 8.18 Texas 9.56 9.89 9.74 8.21 8.38

SOURCE: HSH Associates, Butler, N.J.