Mortgage Refinancing: It’s a Matter of Timing
Q: Last September I refinanced my condo to get a lower interest rate, from 9.25% to an 8.75% fixed rate, and some much-needed cash. Now my mortgage broker is offering me other re-fi deals that sound interesting. The first is an 8.625% fixed loan for 30 years; the other is a 6.25% adjustable that I can convert to a fixed, 20-year loan in one year. The deal carries no points, but the fees would total $2,000, the same amount I paid last year. I should also add that my current loan, for $185,000, runs for only five years; I must refinance it in 1996. Am I smart to grab the lower rates now or should I take my chances on the future? --B.E.
A: Our experts consider this a tough call. If you weren’t obligated to refinance your loan anyway by 1995, there would be no question but that the deals you’re being offered are terrible. But given your situation, someone could make a case that the additional $2,000 in fees you will be forced to pay for the second time in a year could be an acceptable price for the security and peace of mind you are apparently seeking vis-a-vis your mortgage.
However, Morrie Reiff, an Encino financial planner, isn’t one of those about to make that case. According to Reiff, you would be foolish to jump now to grab a fixed mortgage that is just 0.125 of a point lower than what you are locked into paying for the next four years.
For starters, interest rates are volatile now and appear to be heading lower. You have little reason to grab this deal; a better one could be just around the corner. But before you consider grabbing even some deal in the future, you should think about how long you are going to live in your condo. If you are likely to move before you must refinance in 1996, it makes absolutely no sense to refinance. Your current 8.75% mortgage rate is a terrific deal. However, if you are likely to be in your condo past 1996, then you should be on the lookout for a re-fi. But stay turned, better rates could be just ahead as the government lowers interest rates even more to jump-start the nation’s sagging economy.
By the way, Reiff recommends that you find another mortgage broker. He says anyone who would sell you a five-year loan with no guaranteed refinancing package at the end of the loan may just be preying on your naivete and looking out for his own financial interests--not yours.
Converting a Home to Rental Property
Q: My son may soon be moving to another city for a new job. However, if he sells his house here now, he stands to lose money because of declining real estate values in Southern California. Could he convert his home into a rental and then be eligible to declare a capital loss deduction on any loss he suffers upon its sale? Also, how long would the home have to be a rental before it would officially qualify as an investment property? --J.H.L.
A: Yes, your son can convert his home into a rental, but it may not produce the desired tax-deductible loss upon the property’s sale. Why? Because the tax basis of the converted property is established as of the date of the conversion or its purchase--whichever is lower. So, if your son’s property has already declined in value, that fact would have to be recognized in an appraisal conducted when he converts it. Any decline suffered before the conversion could not be written off as an investment loss.
However, if you have reason to believe that your son’s property will continue to decline, or if he just bought it and can use his original sales price as his cost basis, or if he can secure a favorable appraisal, then converting it to a rental might make sense. If he does this, then the longer he holds it as a rental before selling it and taking his investment loss, the better. Our experts recommend at least six months, preferably a full year or more.
Tracking Down Value of Stock Purchases
Q: I was given 25 shares of Sears, Roebuck & Co. stock in 1970 by my grandmother who paid $1,620 for them. Three years later I bought an additional 27 shares, but I have no records of what I paid for them. Then the stock split, 2 for 1, giving me a total of 104 shares. How do I figure my tax liability when I sell them? What should I expect to pay a broker to sell them for me? --B.B.
A: Your first step is to try to figure out what you paid for those additional 27 shares. If you have absolutely no records, perhaps you have an idea of what time of year you made the purchase. Even with just that shred of information, you can research what Sears’ stock was trading for at that time, using either reference materials available at your local public library or at a stock brokerage. If you can’t pinpoint the exact date of the purchase, pick a reasonable trading price for the shares in that period; an average of the high and low for the month or quarter would probably pass muster with the Internal Revenue Service.
Once you have established what you might have paid for the shares, add that amount to the $1,620 and divide the sum by the 104 shares you now hold. This is your cost basis for those 104 shares. (Remember, when a stock splits, so does the cost basis of the original shares.) To figure your taxable gain, you simply deduct the basis from your sales proceeds after paying commission fees.
Brokerage fees will vary according to where you take your business and what the price of the shares is on the day you sell them. These days Sears stock has been trading at about $40 per share. Merrill Lynch, the nation’s largest full service retail brokerage, said it would charge a commission of about $102 for selling your 104 shares; Charles Schwab, the nation’s largest discount brokerage, said its fee would be about $57.
