Mortgage Strategies for Non-Rocket Scientists
Q: In a recent column, you talked about paying off your mortgage early. What can you tell us about those companies that offer to help you do it? What are they really offering--and why should it cost $200 or $250? Can’t I just prepay my mortgage on my own? --A.A.R.
A: The plain truth is that these mortgage paying services don’t offer you anything that you can’t do for yourself. If you are truly dedicated to paying off your mortgage early, you don’t need the services of a company that will charge you money that you could otherwise use to reduce that mortgage. Furthermore, you should also know that some of these services have unsavory reputations and can actually cause you more problems than they purport to solve.
Basically, these services operate as a middleman between you and your lender. They take money from your checking account, usually electronically, every two weeks and they pay your mortgage for you. But they don’t pay your lender every two weeks. They merely make a 13th monthly payment on your mortgage every year. While this extra payment does reduce your loan principal and hence your overall mortgage interest charges--just as the services promise--you aren’t exactly ahead in this business equation. For most of the year, these services have the use of your money, and the ability to earn interest on it. Why would you need this? And why should you pay a fee of anywhere from $200 to $350 to let someone else use your money?
“I can’t see any reason why people should pay for this service,” says Morrie Reiff, an Encino financial planner. “You really don’t need it.”
The loan service companies argue that they provide consumers with a more disciplined way of reducing their mortgage balances because the homeowner is obligated to keep up with the accelerated payments. Plus, they say electronic debiting of the mortgage payment from your checking account reduces the hassle of writing a check each month to your lender. Such a deal!
It doesn’t make sense. With a little self discipline and commitment, you can save up the money for a 13th monthly payment every year, or you can throw in a little extra money in each mortgage payment to reduce your loan balance. There is nothing magical about reducing your loan balance; it is not rocket science. You can do it for yourself and at whatever pace and in whatever amounts you want. All you have to do is talk to your lender about a mortgage repayment acceleration program.
Finally, and potentially most important, several consumer advocates note that some loan service companies have skipped town on their customers, failing to pay the lenders and leaving homeowners with mortgages seriously in default. You don’t need this.
How Joint Tenancy Can Affect Probate
Q: I have a daughter and son and want to avoid probate on my small estate so they can have all that I have saved for them. I have made them joint tenants on my assets and had the vesting on most of those assets read “Susan Jones or child.” However, in some cases the vesting reads “Susan Jones and child.” Now someone has told me that by using the and listing, those assets must go through probate. Is this true? --S.J.
A: Not according to our experts. Our legal authorities say the only thing that matters is that you and your children are truly the joint tenant owners of the assets. If that is the case, then whether you list them with an and or an or doesn’t matter at all. As joint tenants, your children will be entitled to become the full owner of the assets as prescribed in your will, and probate will be avoided.
Just by way of reminder, probate and estate taxes are two separate issues. Avoiding probate does not mean that your estate will escape taxation. If your estate exceeds $600,000 in value, it will be subject to estate taxes.
Writing Off Losses for an IRA Account
Q: Six years ago, I invested my IRA in first trust deeds with a mortgage broker who used a bank as the trustee of the account. The broker has since filed for bankruptcy, and I fear my investment is completely lost. May I write off these losses, and then, if any funds are recovered in the future, report those as income at the time? --E.L.M.
A: As we have explained on several occasions in the past, losses on tax deferred investments such as IRAs are not deductible. Remember, you have not paid taxes on the funds in your IRA. Why should you be allowed a tax deduction if you lose them? You and Uncle Sam are even at this point. You haven’t paid him taxes yet on that money, and he’s not going to give you a tax break for losing it.
However, if you invested after-tax money in your IRA--that is if the funds in your account had already been taxed before you deposited them in the IRA--then you are entitled to a deduction for your loss. But the deduction is allowed only for the amount that has already been taxed. If your IRA had accumulated interest or dividends that were as yet untaxed, you may not claim an investment loss deduction for these funds. One further note: If you are entitled to a deduction, be absolutely sure your investment is worthless before you claim it. As we have discussed before, you must be “reasonably certain” that your investment is “wholly worthless” before you are entitled to the deduction.
