November 20, 2023 By

Q&A: Their variable-rate loan is out of control. What should they do now?

Dear Liz: We paid a lot for our house, and a lot to renovate it seven years ago. My banker recommended taking a low-interest loan against our assets at the bank instead of selling investments to pay for the renovations, which cost $900,000. The bank offered a rate of prime plus half a point. Up until a year ago, this loan cost me about $1,200 to $1,600 per month. However, those payments have now jumped to about $5,000 per month. I’m selling stocks and bonds, on which I will have to pay taxes, to cover this amount. We have enough to pay off the loan, which is what my banker has suggested doing since interest rates have gone up so much. However, my wife and I are reluctant to liquidate so much in stocks and bonds. We would incur the tax consequences and it would not leave us as liquid as we would like to be. We love our house and neighborhood, and we are locked in a mortgage rate of 2.65% for another six years, so we are reluctant to sell. Any advice?

Answer: Your options aren’t great, but you already knew that.

As you’ve learned, variable-rate loans are inherently risky and better for short-term borrowing than for financing long-term debt. Interest rates stayed so low for so long that many people lost sight of the risk that affordable payments might not stay that way.

Interest rates are unlikely to plunge any time soon, but paying off the loan by selling investments could leave you house rich and cash poor. If interest rates do ease, you could regret having incurred unnecessary taxes — plus the investments you sell can’t earn you future returns.

Trying for a cash-out mortgage is another potential solution with significant disadvantages, given current high mortgage rates. Selling your home could be the best option if you can’t afford the property but may be an overreaction if you can.

The right solution will depend on the details of your financial situation. A fiduciary financial advisor — someone dedicated to putting your best interests first — could help you make a more informed decision about what to do next.

Filed Under: Mortgages, Q&A, Real Estate
October 24, 2023 By

Q&A: Home sales and taxes

Dear Liz: My in-laws passed away earlier this year within months of each other. Their primary asset, part of their living trust, is their home, worth close to $1 million. There is a reverse mortgage of about $332,000 that will be paid off once the house sells. Will capital gains tax apply to the four beneficiaries? Or do we get to take advantage of the step up in cost basis? The house is in escrow right now. I don’t think the house has gone up in value since the last death.

Answer: The home will get the favorable step up in tax basis. That means the beneficiaries won’t have to pay capital gains tax on all the appreciation that happened during the parents’ lifetime.

Filed Under: Home Sale Tax, Inheritance, Mortgages, Q&A, Real Estate, Taxes
August 28, 2023 By

Q&A: When a HELOC rate is too good to be true

Dear Liz: My current home mortgage rate is 5%. I owe about $340,000 on the house and have about $300,000 in equity. My credit union is offering a home equity line of credit with a rate of 3%. Would it be a good idea to take out a HELOC at that rate and use those funds to pay down or pay off my mortgage?

Answer: Prevailing HELOC rates are closer to 9%, so what you saw is likely a teaser rate that would eventually expire. After that, you’d pay the regular variable rate, which would rise and fall with prevailing interest rates up to a predetermined cap, which is usually 18%.

So no, it’s not a good idea to give up your current relatively low rate. HELOCs and other variable-rate loans are a better fit for short-term borrowing that you can pay off relatively quickly.

Filed Under: Mortgages, Q&A
July 10, 2023 By

Q&A: How to get out from under a crushing reverse-mortgage debt

Dear Liz: Our elderly father took out a reverse mortgage in 2010 with the goal of getting a $1,000 monthly income stream. Fast forward to today: Dad has passed away, and our mom is still alive at 97. The payback amount of the mortgage has ballooned to $360,000. Because it’s an adjustable rate mortgage, the rate is increasing with the inflation rate. We’re being told that this is all legal, but it seems like usury to me. None of us children have enough cash to pay off the reverse mortgage, so it will continue to go up stratospherically each and every month. The entire balance will become due if she leaves her home or passes away. Do you have any suggestions?

Answer: Reverse mortgages allow borrowers to tap their equity without having to make payments while they remain in the home. But the amounts they borrow accrue interest and, as you’ve seen, the debt can grow substantially over time.

If your mother dies or moves out, the lender will demand payment within 30 days. It may be possible to extend the deadline for up to six months, according to the Consumer Financial Protection Bureau. If you don’t have the cash to pay off the loan, you could try to get a mortgage or to sell the home to pay the debt. If you sell it, you would need to clear enough to pay off the debt or at least get 95% of the home’s appraised value. Another option — especially if there’s little or no equity left — is to simply turn the house over to the lender. You won’t be on the hook if the mortgage balance exceeds what the home is worth.

Filed Under: Mortgages, Q&A
July 11, 2022 By

Q&A: Credit rating after mortgage payoff

Dear Liz: We are recently retired and will own our home free and clear in about six months. Will not having regular mortgage payments dent our credit ratings? If so, what can be done as a good substitute?

Answer: Your credit scores may dip after you pay off your mortgage, particularly if you don’t have another installment loan such as a vehicle or personal loan. To get and keep the highest credit scores, you typically need both installment loans and revolving accounts, such as credit cards.

The good news: You don’t need the highest credit scores to get the best rates and terms from lenders. Using credit cards lightly but regularly can help you maintain good scores without taking on debt.

Filed Under: Credit Scoring, Mortgages, Q&A Tagged With: , ,
June 21, 2022 By

Q&A: Mortgage payoff or emergency savings?

Dear Liz: My husband was laid off recently, and he quickly took a new job with a 25% pay cut to continue insurance benefits and the same retirement program. We regularly pay $500 to $1,300 extra on our house payment. We cannot keep that up. However, with his severance package and vacation day payout, we now have more in our bank account than we owe on our mortgage. If we paid off the $80,000 mortgage now (house is valued at $600,000), we’d have an emergency fund of only $10,000, but we could replenish those savings slowly each month with no house payment. We have no other debts. How do we know when is the right time to pay off the mortgage?

Answer: Think about what would happen if you paid off the mortgage and your husband were to be laid off again or you suffered some other financial setback. The $10,000 left in your emergency fund could be depleted quickly. If you don’t have stocks or other assets you could sell, you might have to raid your retirement accounts or turn to high-cost loans.

This is why financial planners recommend having an emergency fund equal to three to six months’ worth of expenses if possible — and why using your savings to pay off a low-rate debt might not be the best use of your money.

If you’re determined to pay off your mortgage, consider setting up a home equity line of credit first. That will give you a relatively inexpensive source of credit in an emergency.

Filed Under: Mortgages, Q&A, Saving Money Tagged With: , ,
March 7, 2022 By

Q&A: House sale implications for retiree

Dear Liz: I’m 67, divorced since 1992 and retired with a good government pension, a retirement investment fund, some stocks and cash savings. I plan to sell my home of 33 years soon for a hefty profit and buy a smaller home. I owe $100,000 on the mortgage. I worry about a significant increase in payments to Medicare and tax obligations to the IRS. What financial advice do you have for me? This is my first time selling and buying a property on my own.

Answer: Now would be a great time to consult a tax professional about your options. You can exempt as much as $250,000 of home sale profit, but gains beyond that would incur capital gains taxes and could increase your Medicare premiums.

The amount you owe on your mortgage doesn’t affect the tax you owe on a home sale, but other expenses might. For example, you may be able to reduce your taxable profit if you kept good records of the amounts spent on home improvements. What you spent on maintenance and repairs over the years won’t help, but any work that improved the value of your home may be added to what you paid for the home to increase your tax basis. This basis is what’s subtracted from the sale price to help determine your taxable profit. Certain expenses you incurred to buy your home, such as closing costs, and to sell it, such as real estate commissions, also can help reduce the taxable portion.

IRS Publication 523 goes into detail about how to calculate home sale profit, but an enrolled agent (you can get referrals from the National Assn. of Enrolled Agents) or a CPA could be extremely helpful in advising you about these calculations.

Filed Under: Mortgages, Q&A, Real Estate
February 28, 2022 By

Q&A: Worried about identity theft? Here are some things you can do

Dear Liz: Last week I received my annual mortgage interest report. The envelope was not sealed and my full Social Security number was exposed. Two days later, I received an e-mail from PayPal for a purchase made online in my name with a different address. What do I need to do to protect myself from identity theft and are there any penalties my mortgage company could face?

Answer: The penalties for exposing your information depend on your state’s laws. You can contact your state attorney general’s office for more information.

At the very least, consider reporting the issue to the mortgage company and demanding that your Social Security number be redacted in future mailings. Better yet, see if you can go paperless and download your tax documents, a process that is typically more secure than having your private financial information sent through the mail.

It’s entirely possible the fraudulent purchase was unrelated to your mortgage company’s sloppy practices, but you should still take steps to reduce your odds of being victimized again. Obviously, you need to change your PayPal password but you should also make sure all your accounts — especially your financial and email accounts — have unique, complex passwords. A password manager such as LastPass or 1Password can help you keep track.

Good computer hygiene also can help reduce your risk. That means turning on your computer’s firewall, using a secure browser and keeping that browser up to date. Update and frequently run antivirus software as well.

Another important step in reducing identity theft risk is freezing your credit reports at all three major bureaus: Equifax, Experian and TransUnion. This should prevent someone from opening a new fraudulent credit account in your name but won’t prevent account takeovers, such as what may have happened with your PayPal account.

Detect account problems as quickly as possible by regularly reviewing bank, payment and credit card transactions. Consider putting alerts on your accounts for foreign transactions or transactions over a certain size or signing up with a credit- or identity-monitoring service.

Filed Under: Identity Theft, Mortgages, Q&A
February 7, 2022 By

Q&A: Plan for taxes after mortgage payoff

Dear Liz: In a recent column, you answered a question from a couple who just paid off their mortgage. You suggested increasing retirement or emergency savings or possibly charitable contributions. All good, but you should have pointed out that the mortgage lender will not be responsible for paying the property tax and fire insurance going forward. I would suggest the couple open a separate account and build up a fund to pay those expenses or they could be facing financial hardship when the tax and insurance bills come.

Answer: Good point. Many homeowners are accustomed to paying their homeowners insurance and property taxes through escrow accounts set up by their mortgage lenders. Once the loan is paid off, these bills become the homeowners’ responsibility to pay.

Filed Under: Mortgages, Q&A Tagged With: , ,
January 10, 2022 By

Q&A: Mortgage payoff creates options

Dear Liz: My wife and I just paid off our mortgage. What’s the correct thing to do now with the amount we used for the mortgage payments?

Answer: Congratulations! Paying off a mortgage is a big deal, so consider using some of your freed-up money to celebrate in whatever way seems appropriate.

Many Americans don’t have adequate retirement or emergency savings, so those should be high priorities along with paying off any other debt you might have.

If you’re in good shape, though, consider boosting your charitable contributions. Studies show that generosity contributes to happiness, and spending money on others often makes us feel better than spending on ourselves.

Filed Under: Mortgages, Q&A Tagged With: , ,