Your Mortgage : Possible Pitfalls...


If you're like many homeowners, you've probably heard about the interest savings you can reap by shunning traditional mortgages and opting for a "biweekly" loan.

Or maybe you've dreamed about how nice it would be to own a second home at a vacation spot on the ocean, in the desert or overlooking a ski run.

But two letters we recently received from readers raise some important questions about biweekly mortgages and vacation homes. If you don't take the time to answer these questions, you could wind up losing money.

Everyone seems interested in paying their loan off early to slash their overall financing charges. That's one reason we get so many queries about biweekly mortgages.

If you opt for a biweekly payment schedule, you'll make a mortgage payment once every two weeks instead of once a month.

Since each biweekly payment is roughly equal to half the amount you'd pay on a monthly basis, you make the equivalent of 13 monthly payments a year instead of the usual 12.

The accelerated payback schedule can cut the term of your loan by more than a third and save you thousands of dollars in interest charges over the life of the loan.

Unfortunately, too many people get awe-struck by the potential savings that a biweekly loan can offer and don't spend enough time thinking about how a biweekly payback fits into their individual plans.

Toros Chalian of Montebello isn't falling into that trap. He and his wife have 28 years remaining on their 30-year mortgage, and their loan-servicing company has offered to convert their monthly payback schedule to a biweekly one for a one-time charge of $365.

The conversion would shave a bit more than eight years off the remaining term of their loan, but Chalian says the couple plans to move in five years. "Is the biweekly method advisable in our case?," he writes. "Is it worthwhile?"

The answer is, "probably not."

"Since the Chalians won't be in the house much longer, they won't be around long enough to reap the benefits that a biweekly setup can offer," explained Mary Fruscello, a lending expert with the National Assn. of Realtors.

Assuming the lender allows it, Fruscello said, the Chalians might be better off if they simply take the $365 they'd pay to convert to a biweekly format and apply it directly to their outstanding loan balance.

To reduce their long-term financing costs even further, they could also make extra payments toward their principal whenever they get a little extra cash. Not only would they reduce their interest charges, but they'd also avoid locking themselves into a rigid biweekly schedule that could be hard to meet if they run into a cash crunch.

Like so many people who have purchased a home over the past several years, Janet Goodwin--who reads this column in the San Jose Mercury News--has seen the value of her home rise dramatically.

Now she's thinking of buying a vacation home in the High Sierra town of Lake Tahoe or some other resort. "What are the rules for deducting interest payments on a vacation home?" she asks.

The tax breaks you can claim for both a first and second home depend largely on two factors: How much you borrow and how often you use your vacation hideaway.

First, the Internal Revenue Service will generally allow you to borrow up to a combined $1 million to build or buy a first and second home and still write off all your finance charges.

So, if you originally borrowed $150,000 to buy your primary residence, you could theoretically borrow another $850,000 to buy a second home and still deduct all your interest payments on both your first and second loans.

The number of days you actually use your vacation home is a factor because it will determine whether the IRS considers your getaway spot a true "vacation home" or a "rental property."

"If you rent out your second home for no more than 14 days a year, or if you use it personally for more than 14 days a year, it'll probably be considered a 'vacation home' and you can deduct your mortgage-interest payments and property taxes," said Rick Bobrow, a tax partner in the Los Angeles office of accountants Ernst & Young.

"Although you won't be able to take depreciation deductions, you won't have to report the rental income you receive on your income-tax return."

Homes that are rented out for more than two weeks a year can provide even bigger deductions. In addition to write-offs for interest payments and property taxes, you can also take depreciation write-offs based on the amount of time it was rented out.

You can also deduct any operating expenses incurred during the rental period. As a general rule, your deductions in any one year won't be allowed to exceed the rental income that the property generates, but you can carry forward any of these excess annual losses to reduce your eventual resale profit.

Although these general guidelines apply to most taxpayers, it's important to remember that the tax codes are complex and don't always apply evenly to all taxpayers. So, it's a wise idea to consult a tax expert before buying a second home.

Here's one last tip: Some lenders charge a bit higher rate on loans to buy vacation property that is several miles away from their nearest branch office. So, don't forget to check out lenders who have an office in the resort area itself to see if you can get a better deal on your mortgage.

AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of April 12, 1991.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.30% 9.57% 9.44% 7.34% 7.65% California 9.50 9.75 9.63 7.75 7.76 Connecticut 9.31 9.60 9.48 7.21 7.53 Wash. D.C. 9.18 9.46 9.33 7.08 7.35 Florida 9.23 9.58 9.42 7.27 7.66 Mass. 9.31 9.57 9.44 7.25 7.74 New Jersey 9.29 9.59 9.45 7.31 7.77 N.Y. Metro 9.37 9.66 9.53 7.38 7.76 New York 9.48 9.75 9.63 7.50 7.82 N.Y. Co-ops 9.71 9.99 9.92 7.71 8.13 Pa. 9.07 9.40 9.24 7.26 7.45 Texas 9.12 9.40 9.26 7.24 7.41

SOURCE: HSH Associates, Butler, N.J.

Letters and questions may be sent to Myers at the Real Estate section, Los Angeles Times, Times Mirror Square, Los Angeles 90053. Questions cannot be answered individually.

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