By Ilyce R. Glink and Samuel J. Tamkin, The Washington Post, Saturday, March 6, 2010
Q: We want to refinance our home loan. We are at 5.75 percent and might be able to get 4.85 percent on a 30-year, fixed-rate mortgage. We would save $87 to $104 per month, and we are thinking about adding extra money each month to pay off the loan faster.
A: There are four important questions to ask yourself before starting a refinance:
1. Will I lower my interest rate? From your e-mail, it’s clear that you meet this test.
2. Will I lower my monthly payment? You’ll save money each month.
3. Will I shorten my loan term? This is an important question because if you have 25 years left on your loan and are starting up with another 30-year loan, you’ve essentially lost five years of payments. But if you have 25 years left and can refinance to a 15-year mortgage, you’ll come out ahead.
4. What are the costs to refinance? If a lender is going to charge you so much that it will take years to pay off the costs of the refinance with your monthly savings, it may not be worthwhile to refinance.
Of these four questions, the biggest issue is how much time you have left on your loan. In your case, it sounds as if you would have enough room to refinance to a 15-year loan. If your monthly payment is less with a 15-year loan, and you can use that savings to prepay the loan, then you know you’re making a smart move.
But it isn’t really fair to compare monthly payments when a new loan is going to add years of payments. You must also compare what the costs are to close the loan.
The best way to lower the costs on a refinance is to shop around. Talk to at least four or five types of lenders: a credit union (if you belong to one or can join one); a big-box lender (such as Sun Trust, Wells Fargo or Bank of America); a local mortgage broker; an Internet lender (such as ING Direct) or a mortgage aggregator; and a small, local bank that might keep loans in its own investment portfolio.
Before calling any of the lenders, you should visit http://www.annualcreditreport.com to get a free copy of your credit history and pay for a credit score. If your credit score is less than 660, you may not even qualify for a Federal Housing Administration loan, so you would need to spend some time cleaning up your credit.
If your credit score is good, then be sure to share that information with lenders. Tell them: “I know you have to pull your own copy of my credit history and score once I officially apply for the loan. But assume this is current. What kind of interest rate, points and fees would I qualify for?”
Finally, if you do make extra payments, don’t forget to indicate on your payment that the extra is to be applied toward the principal. If you have an escrow account for the payment of real estate taxes or insurance, and you don’t specifically say that the extra is to be used to pay down the loan balance, you might be surprised to find out that your extra payments went into the escrow account and not to pay down your debt.
Q: Both of my parents are in their early 80s. Is there any advantage to having the majority of their assets, including the house, transferred to my name? I would do this only with their approval and the understanding that they have access to any funds through me.
A: I’m sure that you and your parents have a great relationship, and I’m sure they could come to you if they were in financial trouble. But parents don’t like having to rely on their kids for financial support. And often nothing but trouble is created when a parent transfers assets to their children’s names.
While the estate tax is still in limbo (it has disappeared entirely in 2010 but will come back in 2011, giving individuals the ability to pass down just $1 million tax-free, and with higher estate-tax rates), there is no advantage to having your parents gift you their assets now.
First, they might need them. Second, you’re generally better off inheriting these items than receiving them as a gift.
Before this year, if you inherited a home from your parents, you would have inherited it at its value at the time of their death. That is, if you sold the home the day after you inherited it, you would have paid no tax on the sale. The cost of the home to you would have been its value at the time of their death, and the sales price of the home would have established its value; therefore, you would not have made a profit.
However, starting this year, when you inherit a home, its value is determined by what your parents paid for the home and put into the home.
So if your parents purchased the home for $50,000 many years ago and put in improvements of $50,000, the cost basis of the home would be about $100,000. If you then sold the home for $200,000, you would have to pay taxes on the profit between the $100,000 cost basis and the sales price of $200,000.
It’s a tall order for an heir to track down the costs of an asset like a home that was owned by parents who are no longer living. You would be wise to sit down with your parents and go over their finances and determine the cost basis for their home, as well as for any other asset that has appreciated over time.
Here’s another suggestion: Spend some time with an estate attorney, who can lay out the options for various types of trusts, and make sure your parents’ wills and powers of attorney for health care and financial matters are in order. Knowing that the estate is in order will help them, and you.
Q: My friend has a home he lives in, and he owns a house in another state that is about to be foreclosed on. The foreclosure happened because after his divorce, his name came off the deed to the property but not off the mortgage. His ex-spouse failed to make the payments. He owes about $290,000, but the property is worth only $200,000. Can he lose the equity in his primary residence and any money he has in the bank as a result of this foreclosure?
A: Your friend’s biggest problem is that he didn’t insist at the time of his divorce that his ex-spouse refinance the property to take his name off the mortgage.
In some states, a lender can go after other assets once the home is foreclosed on if it is still owed money. A deficiency judgment is given to a lender that is owed more than it gets through the sale of a home in foreclosure. If the foreclosed property is in a non-recourse state, then the lender would foreclose on the property and would not be entitled to go after other assets.
Your friend will need to hire an attorney to make sure that once the property is foreclosed on, the bank will not have the right to go after him for any other money owed. Your friend might also want to talk to the divorce attorney who helped him and get more information. The divorce decree might have provided that the ex-spouse would be solely responsible for the debt on the home. It might turn out that the divorce decree would shield your friend from any consequences from the foreclosure. But he should check that out with his lawyer.
Ilyce R. Glink is an author and nationally syndicated columnist. Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through Glink’s Web sites, http://www.thinkglink.com and http://www.expertrealestatetips.net.
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Hi,
Good read. Yeah, things are like that but it’s great to know people still write good none BS articles like this. Helps me get through the day
Thanks for writing it!