How to ‘Jump Ahead’ on Mortgage and Save Thousands of Dollars
QUESTION: Some time ago you wrote that it is smart to make an extra mortgage principal payment each month and “jump ahead” on the loan amortization schedule. Does it matter if the lender is a private party or a lending institution? Does the “jump ahead” plan work in all states? If the borrower is unable to keep making extra payments each month, what effect would this have on the program?
ANSWER: Whenever I write about the “jump ahead” mortgage prepayment program borrowers get all excited about paying off their 30-year mortgages in just 15 years and saving thousands of interest dollars. The program is so simple and inexpensive it’s a wonder everyone doesn’t use it.
For the record:
12:00 a.m. Sept. 9, 1990 Clarification
Los Angeles Times Sunday September 9, 1990 Home Edition Real Estate Part K Page 4 Column 2 Real Estate Desk 4 inches; 131 words Type of Material: Correction
Some of the text in this Real Estate Q&A; item was omitted when published Sept. 2. It is being repeated in its entirety.
QUESTION: I took title in my house in joint tenancy with my girlfriend. The loan officer pushed us to take title as joint tenants with right of survivorship. He said we could change it later. But now my girlfriend refuses to change the title to tenants in common, so we can each make our one-half subject to our wills. How can I get out of this joint tenancy?
ANSWER: In most states, one joint tenant can execute a quitclaim deed from himself as a joint tenant to himself as a tenant in common. Since there are only two joint tenants in your situation, such action ends the joint tenancy with right of survivorship. However, when a husband and wife hold title as joint tenants by the entirety, the signatures of both spouses are required to terminate the joint tenancy. For further details, please consult a real estate attorney.
Before answering your questions, let me explain how the jump-ahead loan prepayment plan works. The first step is to get a copy of your home loan’s amortization schedule from the lender for the life of the mortgage, usually 30 years. The second step is to remember you always must pay at least your regular monthly mortgage payment every month. The third step is to add to that minimum payment the next month’s principal payment from the amortization schedule.
For example, suppose your regular monthly mortgage payment is $1,000. To keep things very simple, let’s pretend, and this isn’t far from reality, that this month’s loan payment will be allocated $990 to interest and $10 to reduce the loan’s principal balance. Looking at the loan amortization schedule, we see next month’s payment will be allocated $989 to interest and $11 to principal. Using the jump ahead plan, you write a check to the lender this month for $1,011. which is your regular $1,000 payment plus next month’s $11 principal payment. Be sure to tell the lender the extra $11 is for principal.
When your loan payment comes due next month, which is to be allocated $988 for interest and $12 for principal, send the lender an extra $13 for the following month’s principal payment so you can jump ahead again on your amortization schedule.
What have you accomplished in just two months by making an $11 and a $13 extra principal payment in our simple example? You have jumped ahead two months on your loan amortization schedule, thereby saving $989 interest for next month and $987 interest for the following month.
I’m sure you get the idea. Now to answer your questions: This plan works with all lenders on amortized loans. However, if your loan interest is calculated daily on a simple interest basis, it doesn’t work. The plan works in all states. If you can’t make your gradually increasing extra principal payment each month, you can always revert back to your minimum required monthly payment. But then you stop jumping ahead and saving interest every month by cutting the term of your mortgage.
Fixing Up Home Still a Good Investment
Q: The only real estate my wife and I own is our home. We bought it about six years ago and it has proven to be an excellent investment, since it has appreciated handsomely in market value. But we are kicking ourselves because we sold a nearby house that my wife inherited about three years ago. That house also has appreciated in value nicely, but we don’t own it.
We have been looking around for good real estate investments to buy, but we can’t find any that make financial sense. Rental houses don’t produce enough income and we hear apartment buildings can be a management headache. Any suggestions?
A: I agree it is very difficult to buy real estate investment property that makes financial sense. How unfortunate that you sold the house your wife inherited because her investment was virtually zero and even a slight increase in market value is a tremendous yield.
But we can learn from our mistakes. Just as your home and that inherited house appreciated in market value, chances are that will happen again in the future. However, rather than wait for inflation to force real estate values up, why not do something to push up the value of property you acquire.
I think fixer-upper houses offer the best profit potential today, if you can buy them far enough below market value. My goal is $2 of increased market value for each $1 spent on improving fix-up property. Although I don’t always reach that goal, I come close enough.
My suggestion is to buy run-down houses in good areas of your town. Look for distress properties, such as foreclosures, probate properties, IRS tax seizure sales and sheriff’s sales. Then fix them up for either immediate resale or long-term investment.
How Much Fix-Up Should Seller Do?
Q: In a few months we plan to put our home on the market due to a job transfer. Before then we plan to paint it inside and outside. But we are wondering if we also should remodel the bathrooms and kitchen. I hate to think of the mess. They really aren’t bad or very old-fashioned, but they could use some modernizing. Should we do this work?
A: I suggest that you invite two or three local real estate agents to inspect your home and advise if the bathrooms and kitchen need renovation. Chances are you don’t need to do that major work.
But you are very wise to completely paint the house. In the process I presume you will clean and repair as necessary. Another profitable improvement, which usually doesn’t cost much, is new carpeting.
Be sure to install a neutral color, such as beige, and put in the best padding you can get. Also check the landscaping to be sure your home presents a pleasing appearance because the first impression is very important.
Is There Tax When Converting to Rental?
Q: I bought my home about eight years ago for $45,000 and lived in it until last February, when I moved out and rented it to tenants. It was worth about $160,000 when I moved out. Will I have to pay any tax this year on my profit?
A: No. Since you did not sell your home, but just converted it to rental status, you have no sale profit and no capital gain tax to be concerned about.
However, on Schedule E of your federal income tax return you must report the rental income received from the tenants. But you will be able to deduct applicable expenses such as mortgage interest, property taxes, insurance, utilities and repairs.
In addition, you can depreciate the lower of your adjusted cost basis or the fair market value of the property on the date of conversion to a rental house. However, the land value is not depreciable. Your $45,000 cost basis is obviously lower, but you can add to your basis the cost of any capital improvements, such as a room addition or remodeling work completed during ownership.
Balloon Payment in Three Years Too Short
Q: We are considering buying a home where the seller will finance the sale if we make a 10% down payment. However, she will only carry the 90% mortgage for three years. I think that is too short a time, don’t you?
A: Yes. A three-year balloon payment mortgage has too short a fuse. Three years will go by very quickly and if interest rates are high then you could lose the house if you can’t afford to refinance. You will sleep much better if you can get the seller to carry back a five- or 10-year mortgage.
Get Remodeling Bids Before Buying House
Q: Following your advice, we have been looking for bargain-priced houses which need fixing up. We found an ideal candidate in an excellent location. But we are uncertain as to the costs of remodeling it. Is there any way we can tie it up while we get bids on renovation?
A: Of course. Make your home purchase offer in the usual way and get it accepted by the seller. There is no use getting renovation bids until you know you can buy the house at the price and terms you want.
But be certain your offer contains a contingency clause such as, “This offer contingent on buyer obtaining satisfactory bids to renovate the property. Seller to permit reasonable inspections by buyer and contractors for this purpose. Buyer to notify seller in writing within 20 business days if such bids are unsatisfactory.” Then you are protected if the remodeling costs are too high.
Joint Tenancy Isn’t Hard to Break Up
Q: I took title to my house in joint tenancy with my girlfriend. The loan officer pushed us to take title as joint tenants with right of survivorship. He said we could change it later. But now my girlfriend refuses to change the title to tenants in common, so we can each make our one-half subject to our wills. How can I get out of this joint tenancy?
A: In most states, one joint tenant can execute a quitclaim deed from himself as a joint tenant to himself as a tenant in common. Since there are only two joint tenants in your situation, such action ends the joint tenancy with right of survivorship. However, when a husband and wife hold title as joint tenants, the signatures of both spouses are required.
Sewer Fee Should Be on Property Tax Bill
Q: In our town each homeowner pays a $50 per month sewer service fee as part of the water bill. The purpose was to build a new sewer works. However, I have heard it would be better to add the sewer service fee to our real estate tax bill, so we can deduct it on our federal income tax returns. Is this true?
A: Yes. Real estate taxes on your principal residence qualify as an itemized deduction on your federal income tax return. Since each homeowner in your town is paying $600 per year for that fancy new sewer works, it would be to your advantage to eliminate the sewer tax and increase your real estate taxes by that amount to make the $600 deductible on your federal tax returns. Many cities include sewer fees as part of the local property taxes.
Seller Should Impose Time Limit on Clauses
Q: Almost a month ago we signed a sales contract to sell our home. The buyer put a clause in the contract that says “Conditional upon buyer or his authorized agent inspecting and approving the property.” So far, nobody has inspected the house. Our real estate agent says she can’t push the buyer too hard, but I think we have given him enough time don’t you?
A: Yes. The real estate agent should have insisted on a time limit for the inspection and approval. Without a specific time limit on that buyer’s escape clause, if the matter should wind up in litigation, the judge will say the buyer has a “reasonable time.” To one judge a reasonable time might be 30 days, another might say 60 days, or still another judge might feel 10 days is reasonable.
Since the buyer has already had over 30 days it would seem reasonable if you and the real estate agent notify the buyer in writing he has 10 additional days to inspect and approve the house or you will consider the condition waived and then proceed to closing of the sale.
In the current buyer’s market in most cities, the realty agent is correct not to push the buyer too hard. But you have waited a reasonable time and deserve to know if the sale is going to be completed or not.