A Late Payment Hinders Canceling PMI
QUESTION: I phoned my mortgage company recently and asked them to cancel the PMI(private mortgage insurance) on my house. The woman said I would have to wait two years because I was late with a payment six months ago.
She also said that if I had called before then I could have canceled the PMI. Up to that time I hadn’t been late with a payment in four years and I have enough equity to qualify for the PMI cancellation. If I have met the criteria at one point isn’t that enough to allow me to cancel the PMI? Is there anything I can do besides wait the two years?
ANSWER: As you know, the purpose of PMI is to protect the mortgage lender from loss on the portion of the mortgage above 80% loan-to-value. Apparently you obtained a 90% or 95% mortgage when you purchased your home.
At first the PMI was necessary. However, as the loan became more mature and you paid down the loan balance while the house--hopefully--appreciated in market value, the need for PMI on the portion of the loan above 80% became less and less. If your loan is now less than 80% of the home’s current market value, there is no need for PMI and it should be canceled.
However, your one late payment six months ago is causing the lender to hesitate. I suggest that you persist in your quest to drop the PMI. Unfortunately, only a few states have laws specifying when PMI must be dropped; so unless your state has such a law, you are at their mercy. But if you explain to the lender why that one payment was late with good reason, and if you persist, you should be able to get your PMI removed, so your monthly payment can be reduced. Don’t give up.
Depreciating Home Reduces Cost Basis
Q: During various job assignments out of the country we rented our home and depreciated it prior to the 1986 Tax Reform Act. What effect will that depeciation deduction have on our profit tax when we sell the house and use that once-per-lifetime $125,000 tax-free exemption?
A: When you deducted depreciation during the period your home was rented to tenants, the depreciation deduction reduced your adjusted cost basis. At the time you sell, your profit is thereby increased.
For example, suppose you paid $100,000 for your home and deducted $10,000 depreciation while it was rented to tenants. Your adjusted cost basis became $90,000. If you sell it for a net (adjusted) sales price of $200,000, you will have a $110,000 capital gain profit. Without the depreciation deduction, your capital gain in this example would be only $100,000.
Using the “over-55 rule” $125,000 home sale tax exemption, up to $125,000 of your sale profit will be tax-free. To qualify, you must be 55 or older on the day of sale, have owned and lived in your principal residence any three of the five years before its sale and never have used this tax break before. For further details, please consult your tax adviser.
Home Equity Loan Can Jeopardize Refinancing
Q: I contacted my current lender about refinancing our home loan. Since interest rates aren’t quite low enough to make refinancing the obvious choice, the person I talked to suggested I take a home equity loan instead. But he warned me if I take a home equity loan and then decide to refinance the current first mortgage the home equity loan must be at least one year old before refinancing. Is this just a quirk of that lender or do all lenders do this?
A: The major secondary mortgage market lenders, such as Fannie Mae and Freddie Mac, don’t want to buy refinanced mortgages where the homeowner took cash out of the refinancing. So one of their rules says any existing financing must be at least 12 months old, otherwise it will be considered to be a cash-out loan. Your lender apparently sells its mortgages in the secondary mortgage market and gave you accurate advice about a possible refinance pitfall. However, not all lenders follow that same rule.
Increased Payments Cut Interest Costs
Q: I have heard that by paying the interest on my home loan one month in advance along with my regular monthly mortgage payment I can reduce the number of years that I need to carry the mortgage. If this is true, how is this done? Can it be done with an adjustable mortgage too?
A: This question is often asked. To save thousands of dollars of interest on your mortgage, you’ll need to cut its term from 30 years to perhaps 20 or 15 years. Although your monthly payment will have to increase to do this, the interest savings are far greater than the amount of increased monthly payments. There are several ways to do this with either fixed- or adjustable-rate mortgages by making extra principal (not interest) payments each month:
1--Increase your monthly payment by enough to pay off your loan in the desired number of years. For example, if you have a 30-year $100,000 loan at 9% interest with a monthly payment of $804.62, you can pay it off in 20 years by increasing the payment to $886.98, or to $1,014.27 to pay off the mortgage in 15 years. The same plan works for adjustable-rate mortgages, but the interest rate will be constantly changing.
2--A less painful method of speeding the payoff of your mortgage is to add an extra principal payment to your regular monthly payment. You’ll need a loan amortization chart for your mortgage to do this. At first this plan is easy. But then it gets harder each month. To illustrate, suppose your monthly payment is $1,000 and this month $10 of your payment goes toward principal with $990 going toward interest. Just add next month’s principal payment, say $11, and pay $1,011 this month.
If you keep doing this and keep increasing your extra principal payment each month, you will cut your 30-year mortgage to 15 years. In the last few years of your loan virtually all your payments will go toward principal reduction. To use this method, get a loan amortization chart from your mortgage lender, so you can check off each extra principal payment.
Timing Not a Factor in Newlyweds’ Sale
Q: I will be getting married next March. My bride owns a condo that she plans to sell. I own a one-bedroom house I also plan to sell. Then we will buy a two- or three-bedroom house together. Should we sell our residences before or after we get married?
A: It doesn’t matter. If you and your bride have profits in these residences, you can avoid paying tax on your sale profits by purchasing a replacement principal residence whose cost equals or exceeds the adjusted (net) sales price of your two former residences. This is called the “rollover residence replacement rule” of Internal Revenue Code 1034.
To illustrate, suppose your bride’s condo sells for $75,000 and your house sells for $125,000. To defer tax on the profits from both residence sales, you and your new wife must buy a replacement principal residence within 24 months before or after the sales costing at least $200,000 in this example. For further details, consult your tax adviser.
Letters and comments to Robert J. Bruss, a San Francisco-area lawyer, author and real estate broker, may be sent to P.O. Box 280038, San Francisco, Calif. 94128.
