Real Estate Category
Dear Liz: My husband and I are in the process of refinancing our mortgage. I just received my credit report in the mail, and my score was 724. The report indicated that a delinquency resulted in my less-than-stellar score. When I went to the credit bureau site to see where the problem was, I saw that I had a $34 charge on a Visa last year. I rarely use that card, so I did not realize that I had a balance. As a result, I had a delinquent balance for five months last year. I am sick about this, as I always pay my bills on time. To think that my credit score was affected by something so insignificant is really bumming me out. Is there anything I can do to fix this?
Answer: You can try, but creditors are often reluctant to delete true negative information from your credit files. That’s why it’s so important to monitor all of your credit accounts, and to consider signing up for automatic payments so that this doesn’t happen again.
You should know that your mortgage lender won’t look at just one credit score when evaluating your application. Typically, mortgage lenders would request FICO credit scores from each of the three bureaus for both you and your husband, then use the lower of the two middle scores to determine your rate. Even if 724 did turn out to be the lowest of the six scores, you should still get a decent rate, since that’s considered a good score.
Dear Liz: I read your response with interest regarding the two sons in their 60s who were pressuring their parents into taking a reverse mortgage, according to a neighbor who wrote to you about the situation. You may be correct that the sons are trying to get an early inheritance, but you may also be very wrong. The sons may feel well off enough that they don’t need an inheritance and that the money would be better spent by the parents to enjoy their remaining years.
As a reverse mortgage loan officer, I’ve had seniors who are not cash-poor and house-rich go on extended vacations, purchase income properties, buy long-term healthcare policies and fund a research and development project for an invention, to name a few uses. I even know someone who bought a Ferrari, which had been a lifelong desire.
Reverse mortgages are no longer considered to be a loan of last resort. They are, in fact, a source of tax-free cash used in a variety of ways such as preserving and prolonging taxable cash assets, and for seniors who don’t need cash to live on, they may be used by their financial planners for arbitrage purposes.
By the way, I did like your reference to elder care attorneys. Many seniors think it’s a waste of time or way too expensive, but I frequently refer my clients to them as well. They are almost always able to justify the expense in the savings they produce for their clients.
Answer: While there can be many reasonable uses of reverse mortgages, remember that the parents in this case are in their 90s. This may not be a time in their lives when they’re longing for adventure travel, hot cars and investment real estate. It’s certainly not a time in life when they could buy affordable long-term care policies.
There could, however, be another explanation, as the following reader outlines:
Dear Liz: I just read your column about the neighbor’s concern that an elderly couple was being pressured by their sons to get a reverse mortgage. I am glad you mentioned the possibility of fraud by the sons. The elderly are vulnerable and need advocates.
The concerned writer needs to consider another option. Maybe the elderly couple is not doing as well financially as they portray. I was once a concerned neighbor to an elderly widow. As a ploy to remain independent, she was not always upfront about how well (or not well) she was doing. In her case it was health issues that she would hide or downplay (money was not an issue). Though all the neighbors cared and looked out for her, we did not have all the facts that the family had and the family was not aware of all we knew. The concerned neighbor should reach out to the sons. Hopefully the sons are looking out for their parents’ best interests and the neighbor can assist the sons in that common goal.
Answer: Your neighborhood is to be commended for trying to help an elderly person in poor health. Intervening in a financial matter, however, could be fraught with peril and lead to an ugly confrontation with the sons. That’s why directing the parents to an elder law attorney — one affiliated with the National Academy of Elder Law Attorneys at http://www.naela.org — probably would be a better course. The attorney could better protect the parents against potential financial abuse while assessing whether they might need more help than they’re letting on.
Dear Liz: It has been almost one year since my domestic partner passed away, and our home of 43 years is fully paid for. I am ready to sell. The house is structurally in good shape but needs upgrades and a backyard redo. I have heard that painting both inside and out is a plus, but I’m concerned that any other improvements, such as flooring, would be my taste and not the buyer’s. Is it a wise idea to indicate that any major improvements be deducted from escrow funds?
Answer: You’re smart not to take on any major remodeling just before you sell, since few home improvements come anywhere close to paying for themselves. The fix-ups that typically do return more than they cost include painting, deep cleaning, trimming and freshening your landscaping, and de-cluttering. Consider storing half or more of your possessions. You’ll have to pack them up anyway to move, and getting them out of the way now will make your house look bigger.
Talk to your real estate agent about the advisability of replacing your floors. If yours are quite worn, the investment may pay for itself. Otherwise, a cleaning may be enough. You don’t have to offer to pay for the next owner’s improvements. Just price the home appropriately to reflect the fact that it needs updates.
Dear Liz: I have an excellent credit rating, a steady job and an interest-only mortgage of $480,000 on a home now worth $400,000. I also owe $52,000 on an adjustable-rate home equity line of credit. In 2015, the interest-only portion of my loan ends and the principal payments will start, driving my payment to more than $4,000 a month. I have tried for the last four years to work with the lender to achieve some manner of stability, but to no avail. I have been told that my first loan has been sold to an outside investor. Is there any hope for me? I like my house.
Answer: If you haven’t already done so, you should make an appointment with a housing counselor approved by the U.S. Department of Housing and Urban Development. You can find referrals at http://www.hud.gov, or you can call the Consumer Financial Protection Bureau at (855) 411-CFPB (2372) to be connected to a HUD-approved housing counselor.
Housing counselors can evaluate your situation and offer guidance about any programs that might be available to help you refinance or modify this loan. You also should pick up a copy of attorney Stephen Elias’ book, “The Foreclosure Survival Guide,” so you can better understand this process and whether it’s worth fighting to save your home.
HUD-approved housing counselors offer free or low-cost help. Beware of anyone who promises to help you for a fat fee, because it’s probably a scam.
Dear Liz: I have a first mortgage with a current balance of $32,000 at 5.625% interest. This will be paid off in about 24 months, based on regular payments plus $200 a month extra I am paying on principal. I have a home equity line of credit with a balance of $200,000 at 3% interest on which I am paying interest only ($490) monthly with an occasional principal payment when I can afford it. Between the two mortgages I am making payments of about $1,950 per month.
I am about to retire and want to reduce my payments to a more manageable amount. I do not intend to move in the near future. Income is $145,000 annually now but will be reduced to about $76,000 annually upon retirement. Should I just hold on, pay off the first mortgage and then begin making interest plus principal payments on the credit line? Or should I refinance both mortgages now into a 30-year fixed mortgage?
Answer: Ideally, you would retire your mortgage debt before you retire from your job. That’s not possible in your case, so you should focus on making sure this debt doesn’t wreck your retirement.
A spike in interest rates could play havoc with your budget. Mortgage interest rates have been extremely low for some time, but that won’t continue indefinitely. Inflation may pick up as the economy improves, which means that 3% variable rate on your home equity line of credit could march considerably higher.
Consider locking in today’s low mortgage rates with a 30-year, fixed-rate mortgage. You could get an even lower rate on a 15-year mortgage, but the payment would be significantly higher — about $1,600 a month on a $232,000 mortgage, compared with about $1,000 a month for the 30-year loan. You may prefer the flexibility of the 30-year loan, which would still allow you to make extra principal payments to pay off the loan faster without locking you into a higher monthly payment.
Dear Liz: My soon-to-be ex wants to refinance our mortgage to pay for renovations so we can sell it for more money. He also wants to take out some cash to pay off unsecured loans. (I have $11,000 in credit card debt, and he has over $50,000.) The house recently appraised for $310,000 and we owe $158,000 on it. Is it wise to refinance in this circumstance?
Answer: A cash-out refinance would be a risky maneuver even if you intended to stay married. Renovations rarely boost a home sale price enough to cover their cost. Also, home equity that’s used to pay off credit card bills is often wasted, since the borrower never fixes the problem that led to overspending in the first place and simply runs up more debt. Since he would be getting the bulk of the benefit by having more of his debt paid off, you also would need to adjust the rest of your property settlement.
Often, the best and easiest solution in a divorce is to simply sell the house. You certainly wouldn’t want to remain on a mortgage with an ex after the divorce was final, if you could possibly avoid it. A good divorce attorney can give you advice about how to proceed from here.
Dear Liz: You recently answered a question about capital gains taxes that stemmed from two siblings selling their parents’ home. The children had been added to the parents’ deed, presumably before the parents’ death. You mentioned that the capital gains tax would have been avoided if the parents had bequeathed the home rather than gifting it during their lifetimes. Presumably bequeathing the home at death would have necessitated probate and incurred inheritance taxes. Are these costs more than offset by the stepped-up tax basis received?
Answer: Your questions illustrate exactly why no parent should add a child (or anyone else) to a home deed without discussing the issue with an estate-planning attorney first. Too often, laypeople misunderstand what’s involved in probate and make expensive mistakes trying to avoid it.
In some states, probate — the court process that typically follows death — is relatively swift and not very expensive. Trying to avoid it isn’t necessarily cost effective. In other states, including California, the process potentially can take many months and eat up a good chunk of an estate. When that’s the case, it can be prudent to take steps during life to sidestep probate at death.
There are often better ways to do so, however, than adding someone to a deed. A living trust, for example, can be a good way to avoid probate and preserve the tax benefits of bequeathing, rather than gifting, assets. Living trusts can vary in cost, but a lawyer can typically set one up for $2,000 or $3,000. If you compare that with the $25,000 or more the siblings will pay in capital gains on a relatively modest home sale, you can see that the living trust probably is a better deal.
Now let’s turn to the issue of estate taxes. If the assets left by the deceased are substantial enough to incur estate taxes, they will do so whether or not the estate goes through probate. Avoiding probate, in other words, does not avoid estate taxes. Currently, only estates worth more than $5.12 million face federal estate taxes. That limit is scheduled to drop next year to $1 million, but will still affect relatively few estates.
Dear Liz: Your column on the tax issues that develop when parents deed their property to their children should help educate a lot of people. But sometimes this is done to reduce the parents’ assets so they will be eligible for Medicaid after the expiration of the look-back period. In this case, paying the capital gains tax is appropriate, because they are asking the state to pay potentially very large senior care bills.
Answer: Some would question whether it’s ever appropriate for seniors to deliberately impoverish themselves by transferring away assets in order to qualify for Medicaid, which pays long-term care expenses for the indigent. The “look back” period, in which states examine asset transfers before a Medicaid application, was established to discourage such maneuvers. Once again, it’s smart to get a legal opinion before transferring big assets. An elder-law attorney could weigh in on the pros and cons of Medicaid planning.
Dear Liz: My wife and I are trying to sell our home, which has been our primary residence for six years. I am very concerned about the $500,000 capital gains exclusion. As I understand it, the exclusion would mean we wouldn’t have to pay taxes on our home sale profit. But we are confused about this exemption being tied to the “Bush tax cuts” that could expire Dec. 31. If we sell our home after that, could we lose the exemption?
Answer: No. The law creating a capital gains exemption for home sales went into effect May 6, 1997. It’s not tied to the tax cuts approved during President George W. Bush’s tenure that are set to expire at the end of the year.
So people who live in a home for at least two of the previous five years will still be able to avoid paying capital gains on their first $250,000 of home sale profit (or $500,000 for a married couple).
Another tax you likely won’t have to pay is a new 3.8% levy on what’s called “net investment income.” Some emails circulating on the Internet falsely claim that the tax, which is scheduled to kick in Jan. 1, is a real estate sales tax. In reality, it’s a potential tax on home sale profits that exceed the capital gains exemption limit, as well as on other so-called unearned income, including investment and rental income.
If your home sale profit doesn’t exceed the capital gains exemption limit, you won’t owe the new tax. If your profit does exceed the limit, the excess amount would be added to your adjusted gross incomes to determine whether you’d have to pay it. The 3.8% tax would be levied only on people whose adjusted gross incomes are more than $200,000 for singles and $250,000 for married couples.