Watch Those Adjustable-Rate Mortgage Increases
Q: I have had an adjustable-rate mortgage with a bank for the last 10 years, but have no idea if the rates have been correctly handled or if I have paid the correct amounts. Is there some service that could check to see if I have been paying too much? --J. W.
A: You don’t have to suspect that your mortgage payment is too high to want an independent assessment of your payment schedule. Borrowers should have a full and clear understanding of the underpinnings of their mortgage payments--probably their largest monthly expense. This is especially true with adjustable-rate mortgages, which account for a huge portion of home loans.
However, before you rush to get a potentially costly evaluation of your mortgage, you should carefully review your loan documents to get a full understanding of the terms and conditions. Do you know the index to which your loan is pegged? In California, many lenders use the “11th District cost of funds,” which, despite its esoteric title, is simply the interest rates that banks in the Western states must pay in a given month to attract deposits. Typically, loans tied to the 11th District cost of funds run about two percentage points above that index, a margin that becomes the lenders’ operating profit.
Variable-rate mortgage holders should know the spread between their mortgage rate and the index to which their loan is pegged, how often the loan can be adjusted, the maximum increase allowed each year and the maximum increase allowed over the life of the loan. All this is spelled out in the mortgage documents. Further, you should know whether the exact date on which your mortgage payment is credited to your account influences the split between that month’s interest and principal payments. In some cases, paying just a few days one way or the other could make a sizable difference when a long-term loan is finally retired.
Each time your loan is adjusted, you should be notified and informed of the new interest rate as well as the rate of the index to which your loan is tied. Major cost-of-money indexes are regularly published in this and other financial newspapers. Check to be sure that your lender has not made a mistake.
Fixed-rate mortgage holders should be able to get an amortization schedule for all 360 months the loan is set to run. Variable-rate holders can get an amortization schedule only for the period the most recent interest rate is to run. If your lender won’t provide you with one or you suspect that your variable rate loan is being improperly adjusted, you have several alternatives. Books of amortization schedules are available, as are computer programs that can perform the calculations. Some special calculators can handle the task. Special mortgage services can analyze your adjustable-rate loan and prepare amortization schedules--all for a fee, of course. Mortgage Surveillance Reports in Irvine offers a $40 mortgage audit that promises a complete evaluation of an adjustable-rate mortgage from its inception, to determine if rates have been properly calculated and the loan properly amortized. The service also offers amortization schedules. For more information, call (714) 455-1775. Mortgage Monitor in Norwalk, Conn., evaluates both adjustable-rate mortgages and fixed-rate mortgages where an impound account for taxes and/or insurance is involved. The fee for this service starts at $99 and rises according to the complexity of the loan. For more information, call (800) 548-8282.
Prepaying Your Income Taxes
Q: I want to avoid paying additional taxes next April by prepaying as much as necessary throughout the year. The problem is that I am retired and none of my income is subject to withholding. I get about $10,500 from my pension, another $6,600 from my individual retirement account and about $3,800 from Social Security. How much should I be prepaying each quarter? --D.E.C. A: Without additional information, we cannot be absolutely precise in our calculations. But the following calculations were made by a certified public accountant and were based on standard assumptions contained in a tax accounting program for personal computers:
If you are under 65, the calculations show that your 1993 federal tax bill will be about $1,650 and that you will owe the state of California about $275. You should be sending about $415 to Uncle Sam and $65 to the state with quarterly estimated tax filings.
If you are over 65, your 1993 tax bill will be about $1,500. Your state tax bill would not drop. This means quarterly estimated tax filings of $375 to the federal government and $65 to the state.
Transferring Assets Into Joint Accounts
Q: Are there any tax consequences to transferring assets now held in an individual account to a joint account? Does it matter if the joint account is with a spouse? Would the transfer be considered a gift? -- E. K.
A: It matters a lot whether the person being added as an owner of the assets is a spouse. If a spouse is involved, the transaction is completely non-taxable, since there is no limit on the amount of property that may be exchanged between spouses. Gift tax implications are involved if the person is not a spouse. Remember, except for spouses, one individual may give any other up to $10,000 a year without triggering gift tax consequences.
