June 15, 2020 By

Q&A: Refinancing reverse mortgage

Dear Liz: I am a senior citizen who fell for the hype about reverse mortgages during a really hard time in my life. To this date I regret profoundly having sold my home to the devil! I never imagined that my debt would grow such as it has. My home is currently valued at $120,000 and my debt is $189,000. I was paid just $40,000 when I initiated the loan. Plus, the loan was sold to a company I don’t like. They charge fees for everything, which just adds to the debt, and I am totally unable to do anything about what they charge. Can I refinance this loan with another company?

Answer: A reverse mortgage technically can be refinanced, but you would need to have substantial equity in your home. Since that’s not the case, you’re stuck.

Many people don’t understand how a reverse mortgage balance can grow over time. Although reverse mortgages allow people 62 and older to convert home equity to cash, without requiring payments, any amount borrowed grows at the interest rate specified in the loan contract. People who tap their home equity early in retirement may find they don’t have any equity left later.

Although your debt exceeds your home’s value, neither you nor your heirs will be on the hook for the difference. The lender will have to accept the proceeds of the home’s sale when you die, sell or move out as payment in full.

Filed Under: Q&A, Real Estate Tagged With: ,
April 27, 2020 By

Q&A: Taxes when inheriting a home

Dear Liz: My sister recently passed, and I acquired her home, which I’m selling (it’s now in escrow). I was looking at state tax forms for real estate transactions, and there is nowhere to check for a person who was given a home through death. Does this mean it is taxable? I was told since it was an inheritance that it was not taxable.

Answer: Technically, you weren’t given a home. You inherited it, and you’re correct that inheritances are typically not taxable. (Only six states impose inheritance taxes, and your state, California, is not one of them.) When you inherited the home, the property received what’s known as a step-up in tax basis, so that the appreciation that occurred during your sister’s lifetime is not taxed. You would owe tax only on any appreciation that occurred since you owned the property. A tax pro can help you figure out what you might owe.

Filed Under: Inheritance, Q&A, Real Estate, Taxes Tagged With: , , ,
January 27, 2020 By

Q&A:Don’t make this mistake with your retirement savings

Dear Liz: My wife and I are in our mid-40s and planning to buy what likely will be the last house we’ll purchase. I’ve decided to withdraw around $15,000 from my IRA to buy down the rate, which will guarantee returns in the form of interest savings, even if those will be less than the returns I would earn if I left the money in the account. My real question is about our current house. We owe around $77,000 on a house that could likely fetch in the low $200,000 range. I’ve looked at it up, down and sideways. Would it make more sense to rent, sell, or rent then sell after a couple of years to avoid the capital gains tax?

Answer: Sometimes it can make sense to buy down a mortgage interest rate by paying more upfront if you plan to stay in the home for many years. The deals vary by lender, but you might pay 1% of the loan amount (one point) to get a rate that’s 0.25% lower, or 2% (two points) to get the rate reduced by 0.5%. For example, paying two points on a $200,000 mortgage, or $4,000, could lower the rate from 4.5% to 4%. You would drop the monthly payment about $59, and it would take you nearly six years for the slightly lower monthly payments to offset what you paid upfront.

You complicate the math, though, when the money used to buy down the rate comes out of a retirement account. That money is taxed as income and would likely be penalized as well because you aren’t yet 59½. (There’s an exception to the penalty for first-time home buyers who withdraw up to $10,000, but they’ll still owe income tax on the withdrawal.) The tax bill varies according to your tax bracket and your state, but you can expect it to equal roughly one-quarter to one-half of the amount withdrawn.

In addition to the tax bill, you’ve also given up future tax-deferred returns on the money. And because most people’s incomes drop in retirement, you’re probably paying a higher tax rate than you would if you withdrew the money later.

A good rule of thumb is to consult a tax pro before you take any money out of a retirement account. The rules can be complex and it’s easy to make an expensive mistake. A tax pro also could advise you about the tax implications of renting vs. selling, although you might also want to talk to anyone you know who’s a landlord about what’s involved with renting out a property.

The simplest solution may be to sell your current home and use the equity to reduce the size of the loan you’ll need on the next residence, rather than raiding a retirement fund to get a slightly lower rate.

Filed Under: Q&A, Real Estate, Retirement, Taxes Tagged With: , , ,
January 20, 2020 By

Q&A: How to keep tax benefits when renting out your primary residence

Dear Liz: If my wife and I sell our primary residence of 12 years, I understand we can exclude up to $500,000 in home sale profits from taxes. But if we rent it for a year or two, then sell, have we lost that tax break by converting it to income property?

Answer: As long as you lived in the property at least two of the five years before the sale, you can use the home sale exclusion that allows each owner to protect $250,000 of profits from taxation.

You would pay capital gains rates on profits above that amount, but a big home sale profit could have other tax implications.

If you’re covered by Medicare, for example, profits above the exclusion amounts could temporarily increase your monthly premiums. This is because the income-related monthly adjustment amount, which is added to premiums when modified adjusted gross income exceeds $87,000 for singles or $174,000 for married couples.

If you might be affected, you’d be smart to consult a tax professional to see if there’s a way to structure the sale to reduce these effects.

Also, renting property has its own set of tax rules, making it even more important to have a tax pro who can assist you.

Filed Under: Q&A, Real Estate, Taxes Tagged With: , , ,
August 26, 2019 By

Q&A: Why not to prepay a mortgage

Dear Liz: I want to save interest by making biweekly mortgage payments. My loan company said I couldn’t do that, but I wondered if there was a way by first paying the monthly mortgage and then making a half payment mid-month toward the next month’s due date, to get started. Then I’d make another half payment at the beginning of the following month. Ideally, this would all be arranged with autopay. I’m retired with a 4%, 30-year mortgage that has a $1,900 monthly payment and my retirement accounts are currently paying better returns.

Answer: You actually won’t save any interest until your mortgage is paid off, which could be 25 years from now if your mortgage is relatively recent. And getting a better return from your investments is a good reason not to accelerate your mortgage payments. You also shouldn’t prepay a mortgage if you have any other debt, lack a substantial emergency fund or are inadequately insured. (Those who are still working also should be maxing out their retirement contributions before making extra mortgage payments.)

With a biweekly payment plan, you’d pay half your monthly mortgage payment every two weeks. Instead of making 12 payments a year, you make the equivalent of 13 payments. Paying the extra amount helps you pay off the mortgage sooner. A bi-weekly payment plan would shave about four years off a $400,000 mortgage at 4%. The interest savings kick in once you’re mortgage-free. Then you’d save the $47,000 or so in interest you’d otherwise pay in the final years of the loan.

If you’re determined to do this, you should talk to your mortgage lender, because the arrangement you’re describing sounds a lot like the biweekly payments it won’t accept. You could hire a company that specializes in these arrangements, but the fees you pay for the service detract from your savings and aren’t really necessary. Instead, consider simply making an extra payment against the principal each month. Ask your lender how to set this up with autopay so that you’re actually paying principal. Otherwise, the extra amount might just be applied to the next month’s payment, defeating the purpose.

Filed Under: Mortgages, Q&A, Real Estate Tagged With: , ,
July 8, 2019 By

Q&A: Limiting your rate shopping window

Dear Liz: We’re planning to refinance our mortgage and are concerned about generating multiple credit inquiries which would lower our excellent credit scores. Is there some kind of licensed, bonded ethical middle-agent who could get just one official credit report from each of the three bureaus and then send it to all the lenders I designate? Our FICOs are so good that we want lenders to compete for our refi business but don’t want the process itself to lower FICOs just for inquiries only.

Answer: The FICO formula has you covered. With the FICO scores most lenders use, multiple mortgage inquiries made within a 45-day window are aggregated together and counted as one. Furthermore, any inquiries made within the previous 30 days are ignored entirely. That allows you to rate shop for mortgages without dramatically affecting your scores.

The FICO formula extends this “de-duplication” process to two other types of borrowing: auto loans and student loans. Only similar types of inquiries are grouped together, however. If you shopped for both mortgages and auto loans, then two inquiries eventually would be factored into your credit scores, rather than just one.

Credit cards, personal loans and other types of borrowing don’t get the same treatment. If you apply for two credit cards while shopping for a mortgage, you would have three inquiries — two that are immediately factored into your scores and a third that would be counted after 30 days had passed.

Also, some lenders use older versions of the FICO formula that have a shorter rate-shopping window — 14 days instead of 45. If you want to be absolutely sure your mortgage shopping has a minimal impact on your scores, you can limit your shopping to that two-week period.

Filed Under: Credit Scoring, Q&A, Real Estate Tagged With: , , , ,
June 24, 2019 By

Q&A: Don’t expect timeshares to increase in value

Dear Liz: I’m trying to get rid of my timeshare. Do you have any suggestions for me, as a single mom, on making any money from this? Even a few grand would be nice (and yes, I’ve tried both Craigslist and EBay). I paid a whopping $15,000 in 2010, so it’s paid for, but annual maintenance fees have just gone up each year. The fees are now over $1,100, and I fear for the future.

The developer is willing to take back my timeshare and not charge me the $1,000 they usually do. They act like they’re doing me this huge favor but I’m out $15,000! I was told by their sales representative it was real estate property that would increase in value. I’m just so sick to my stomach over this. Should I just give it back and walk away, or do you have anything you can think of for me to try to get even a small amount of money?

Answer: Timeshares should not be purchased, or sold, as an investment. The developer may raise the price of newly sold timeshares, but that doesn’t mean the one you purchased has any value at all on the resale market.

Clearly the sales rep deceived you, but timeshare contracts typically have a clause that absolves the developer from responsibility for anything sales reps say. Timeshare attorney Michael Finn of Largo, Fla., calls that the “license to lie” clause.

Your $15,000 is what economists call a “sunk cost.” You’re not going to get the money back. If you continue to try, you may fall victim to another type of scam, where con artists convince you that they can sell your timeshare — if only you pay them a hefty upfront fee.

You should take the developer up on its offer. Many developers won’t take back timeshares even if you pay them. Your other alternative is to try to sell it for $1 or less on a timeshare owners’ site such as Redweek or Timeshare Users Group, but sometimes owners have to offer to pay one or two years’ worth of maintenance fees just to convince someone else to take the timeshares off their hands.

Filed Under: Q&A, Real Estate
June 17, 2019 By

Q&A: When family balks at paying their fair share

Dear Liz: I inherited half a duplex from my parents. They were partners with my aunt and uncle. When alive, all parties shared expenses for the common areas. I rent out my half of the duplex while my aunt still lives in the other half. My cousins now control my aunt’s finances (she is 94 and in poor health). They refuse to reimburse me for common-area expenses such as painting the exterior (the paint was peeling, exposing the wood, and hadn’t been painted in more than 10 years) and repairing and updating the electrical panel, which had frayed and exposed wires that posed a fire hazard. The panel is on their half of the duplex but serves both units. These costs were about $15,000. What can I do? It’s not fair that I pay for everything when both owners benefit from the necessary repairs.

Answer: Your best hope may be to change your approach. Did you ask your cousins to help you pay for the repairs before you had them done, or only afterward? If they had no input into what was done or how, it’s understandable that they would balk when presented with half the bill.

Of course, they might have balked anyway, and that’s why owning property with other people can get tricky: They often don’t share your opinions about what needs to be done and how much to spend. Some prefer to defer maintenance and repairs indefinitely rather than shell out money to protect their investment. Others understand how important maintenance and repairs are but might want to do some of the work themselves to save money (although do-it-yourselfers shouldn’t attempt an electrical panel upgrade, obviously.)

So your frustration is understandable, but your options may be limited. If you can’t work something out with your cousins, your alternative may be to sell your half of the duplex, but that could require going to court to force a “partition” of the property. You should talk to an attorney familiar with the property laws in your state so you can get an idea of your options and their cost.

Filed Under: Inheritance, Q&A, Real Estate Tagged With: , , , ,
June 10, 2019 By

Q&A: How to boost your credit score before you buy a house

Dear Liz: I am trying to purchase my first home. I have a 20% down payment for the price range that I am looking for. The issue I am running into is that I have relatively new credit and my credit score is not great at all. I had to go to the emergency room two years back with no insurance and have medical expenses that went into collections. I am now in a financial spot to pay them off. These are the only negatives on my credit report that are unresolved. Will paying these off get my credit to the point that I can buy a home? I am lost as to how to get my score where it needs to be.

Answer: Unfortunately, paying collection accounts typically doesn’t help your credit scores, especially the scores used by most mortgage lenders.

Since you’re new to credit, you may not realize that you don’t have just one credit score. You have many. The two major types are FICO and VantageScore. The latest versions of each (FICO 9 and VantageScore 3.0 and 4.0), ignore paid collections. In addition, FICO 9 and VantageScore 4.0 count unpaid medical collections less heavily against you than other unpaid debts.

But mortgage lenders typically use much older versions of the FICO score, which count all collections against you even if they’re paid.

That said, it would be tough to get a mortgage with unpaid collections on your credit report. Since you have the cash, you may be able to negotiate discounts so that you can resolve these debts at a somewhat lower cost. (Collectors typically would much rather get a lump-sum settlement than wait to be paid over time.)

You’ll also want to get some positive information reported to the credit bureaus to help offset the negative information. The fastest way to do that would be to persuade someone you know who has good credit to add you as an authorized user to one of his or her credit cards. This person doesn’t have to give you the card or any access to the account. Typically, the account history will be “imported” to your credit reports, which can help your scores as long as the person continues to use the card responsibly.

Another way to add positive information is with a credit-builder loan, offered by many credit unions and Self Lender, an online loan site. Usually, credit-builder loans put the money you borrow into a savings account or certificate of deposit that you can claim after you’ve made 12 on-time payments. This helps you build savings at the same time you’re building your credit.

Secured credit cards also can help. With a secured card, you make a deposit with the issuing bank of $200 or more. You get a credit limit that’s typically equal to that deposit. Making small charges on the account and paying it off in full every month can help you build credit without paying interest. You’ll want a card that reports to all three credit bureaus, because mortgage lenders typically pull FICO scores from all three bureaus and use the middle of the three scores to determine your rate and terms.

Filed Under: Credit Scoring, Q&A, Real Estate Tagged With: , , , , ,
June 3, 2019 By

Q&A: Selling an inherited house to a relative will affect tax treatment

Dear Liz: My mother recently died, leaving a house to my three siblings and me. We had the house appraised in February. My sister is buying the rest of us out. We decided to give our sister a break and sold her the house below the appraised amount. As the “selling price” (which will be a public record) will be below the appraisal, can I take my “loss” on my taxes this year? I gave her a $25,000 reduction, so I assume I can take $3,000 a year for eight years. Is this true?

Answer: Probably not.

The sale to a family member probably dooms any chance of taking a capital loss, said Mark Luscombe, principal analyst for tax and accounting at Wolters Kluwer.

“The law is not entirely clear on this topic with the IRS perhaps taking a more severe stand than the Tax Court, but both seem to frown on any use of the real estate for personal purposes after the death of the parent,” Luscombe said.

For a capital loss, the IRS appears to require that the inherited property be sold in an arm’s length transaction to an unrelated person, Luscombe said. The IRS also requires that you and your siblings did not use the property for personal purposes and did not intend to convert the property to personal use before the sale.

Even the Tax Court cases appear to at least require a conversion to an income-producing purpose before the sale and no personal use of the property after the death of the parent.

“The reader may find a court willing to say that personal use by a sibling is not personal use by the reader, and, from the reader’s perspective, it was converted to investment property,” Luscombe said. “However, since this was a sale to a sibling and not an unrelated person, I think that the IRS would disagree with that position.”

Filed Under: Inheritance, Q&A, Real Estate, Taxes