Weigh current interest rates, long-term plans before taking plunge
Benny L. Kass
DEAR BENNY: I have an adjustable-rate mortgage (ARM) with one more year to go. When is the best time to refinance? Also, should I get an equity line of credit for household emergencies or home improvements? –Michael
DEAR MICHAEL: Your second question is easy. I strongly recommend that every homeowner who has some equity in his or her house get a HELOC, or home equity line of credit. Many banks will not charge any fees for setting this up. The advantage of such a loan is that you do not have to pay any interest (or any monthly mortgage payments) until such time as you begin to borrow money — i.e., tap into the line of credit.
To me, it’s a checkbook in a desk drawer — ready to be used for that rainy day.
Your first question is much more difficult. You have to review the terms and conditions of your ARM loan. Is there a cap on the amount that your loan can increase every year? Many ARMs will go up (or down) no more than 2 percent per year, with a lifetime cap of 5 or 6 percent.
Let’s say that your current rate is 4.5 percent and it will increase next year to 6.5. This latter rate is just about what you can get in today’s market should you decide to refinance. So it may not pay to refinance at this point in time. On the other hand, if your current rate is 5.5 percent, and next year your rate will increase to 7.5, then it might pay to refinance now.
How long will you keep the house? If you have plans to sell it within the next year or so, then it would not make sense to pay all of the various lender and settlement charges required in a refinance.
On the other hand, if you believe that you will stay in the house for many more years, I would consider refinancing now. It will give you peace of mind. Fixed 30-year mortgage rates are still reasonable, and below 7 percent. Who knows what rates will be a year from now?
DEAR BENNY: I own a rental property. When my previous property manager received late fees from tenants who were slow in paying their rent, he turned these late fees over to me. The current property manager keeps the late fees, stating that this is her policy. What is the correct procedure regarding who owns the late fees? –Rose
DEAR ROSE: To my knowledge, there is no correct procedure. The property manager should have advised you of her policy before you entered in to a property management contract, and this policy should be spelled out in that contract.
I understand the property manager’s position. If a tenant is late, the manager has to send out delinquent notices, and often will have one or more phone conversations with the tenant. This takes time, and the manager should be compensated for this work. But if your contract is silent as to who keeps any late fees, I would take the position that this is your property and that all rental income — including late fees — belong to you.
DEAR BENNY: I closed on a house and received my proceeds check. At the time I was unemployed and paid some of my debts. Several days later I received a call from the title company wanting part of the money back because they miscalculated taxes. Am I liable for their mistake? –Sonja
DEAR SONJA: Have you confirmed that the title company really made a mistake? You may want to have an independent person review the file so that you can be comfortable that a mistake was, in fact, made.
If there was a mistake, I believe you are obligated to reimburse the title company for any out-of-pocket moneys they had to pay. I also suspect that you signed a document at settlement agreeing to cooperate with the title company and to reimburse them for any good-faith, unintentional errors they may have made.
DEAR BENNY: I recently looked at a condominium unit that was lowered in price to attract buyers. It was a converted apartment complex and not in a bad area of the city. The day before I was scheduled to go in and sign the papers, I was told that the developer decided to rent out the remaining units that were not selling. My question: Is that bad news for me as a potential buyer? Should I forget buying into this property? –Rachel
DEAR RACHEL: I have two crystal balls on my desk, and unfortunately both are very cloudy. Existing condominium projects are starting to have concerns — and problems — where there are too many renters as compared to resident owners. Mortgage lenders are sometimes reluctant to make favorable loans where the ratio of renters to owners is too high. The secondary mortgage market — such as Freddie Mac and Fannie Mae — has imposed certain restrictions, such as no more than 40 or 60 percent of the units’ owners can be landlords.
Many community association leaders believe that renters do not have the same incentive as owners to honor and respect the rules and regulations of the association, and do not take good care of the property. While this is debatable, it is a fact that has to be considered.
So, if there are problems with existing condominiums, I suspect that there will even be more issues when the association is brand-new. Legally, the developer — as owner of the unsold, rented units — may be obligated to pay the condominium fees for the units that are rented, but the legal documents of the association have to be reviewed to make sure what the obligations of the developer are.
The price was lowered to attract buyers. But do you have any guarantee that the price will not be lowered even more — after you buy?
Interest rates are still in a comfortable range. If you want to take a chance that this will be a good investment — then go for it. However, I tell all my clients that buying real estate is no longer guaranteed to give you a good return. If you are considering living in the unit and can get some more “perks” from the developer, then it may be something you should consider.
However, here’s what you should ask the developer to do for you: (1) pay all closing costs; (2) pay the applicable recondition and transfer taxes, and (3) if the price of similar units is lowered within the next year, provide a proportionate rebate.
DEAR BENNY: We have owned and lived in our single-family house for eight years. We are now planning to move to a new house that we’ve built and rent out our current house. There is still an outstanding mortgage on the current house, but the rent will pay its mortgage and taxes. Since the house is not going to be used as a primary residence anymore, do I need to inform my mortgage lender (credit union) about this change and, if so, is that going to affect my interest rate? My mortgage is 30-year fixed. Do I need to inform the homeowners insurance company? –Farhad
DEAR FARHAD: No. You do not have to advise your mortgage lender. You obtained the loan eight years ago, and have lived there all those years. You have the right to rent out your house, and keep the existing loan.
You should, however, discuss the situation with your insurance company and make sure that you have the appropriate insurance coverage. You also want to insist that any tenant you get will also have adequate insurance.
DEAR BENNY: I bought my condo 15 years ago for $59,000 and have built up a good amount of equity. It was recently appraised for $165,000. I recently obtained a $28,000 home-equity loan in which to pay off all my debt, mostly credit cards. My home-equity loan rate is 6.9 percent for 15 years. My payments on the loan are nearly half of what I was paying monthly on my credit cards. I am extremely happy to know my credit-card debt is completely gone and my payments are less, thus allowing me to save a little more each month.
Am I missing something here — is there any downside to my situation? The only negative I can see is that I have to make a home-equity payment for 15 years. However, my debt is gone now, and if I sell my condo before the home-equity loan is paid off, the balance will come off my profit. My current mortgage balance is $45,000, thus giving me $120,000 in equity (minus the $28,000 home-equity loan, I would have $92,000 in current equity). I just would like to know for sure that I am not missing something that might come back to haunt me in the future if and when I sell my condo. My credit score is very good, even before paying off my credit cards with this home-equity loan. –Rod
DEAR ROD: Stay happy. You have made some good decisions. My only suggestion: You may want to add a little extra money when you send in your monthly mortgage payment. For every extra dollar, your loan balance will decrease, which means that the loan balance will decrease faster. You should talk with a financial advisor to determine if this would make sense for you. You can, of course, put this extra money into a savings account for that rainy day.
Benny L. Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column.
Copyright 2008 Benny L. Kass