But if you insist on being 'free and clear,' here's how to do it
Q: Our condominium unit is now worth approximately $350,000, and we owe only $25,000 on our mortgage. We are from the old school, and want to own this property free and clear. We have the money, and are considering paying off the loan. Is this a good idea, and if so, how do we go about making sure that it is done correctly?
A: The old school is a reference to our parents (or grandparents) who lived through the recession in the 1930s. Because the stock market crashed, and lots of people were unemployed, those who owned their home free and clear of any debt at least had a roof over their head and did not have to sleep in the streets or under the bridges.
There are many people today with this same mindset, and while I personally disagree with this concept, I certainly respect and understand their views.
Let me play devil's advocate. You have $325,000 in dead equity -- this is the difference between what your property is worth and what you currently owe. Three or four years ago, your condominium unit probably increased in value between 10 and 20 percent, if not more. In today's market, the value of your home has probably decreased slightly, although some recent statistics regarding Washington, D.C., indicate that while sales have slumped, property values last year nevertheless increased by about 10-12 percent.
Appreciation is not dependent on whether you have a mortgage or on how much you owe on your home. The house will increase (or decrease) in value regardless of whether you have a mortgage. Thus, in my opinion, the money you have in your property -- which we call "equity" -- is just sitting there; it is "dead equity."
You now want to take $25,000 out of your savings and pay off the loan. Why? You are getting some small tax benefit from the interest deductions and presumably you are getting a decent rate of return on your investments. Other than the satisfaction of owning your house free and clear, I do not see any benefits by paying off that mortgage.
In fact, I would recommend that you consider refinancing. Interest rates today are comfortably low, with the national average for a fixed 30-year loan hovering around 5.5 percent. You could, for example, borrow $100,000, pay off your outstanding debt, and after paying closing and settlement costs walk away tax-free with approximately $73,000. The monthly mortgage payment on this loan (at 5 5/8 percent) would be $575.66 -- which is probably close to what you are currently paying. And because this is a new mortgage, your interest deductions would be larger.
For example, if you are in the 28 percent tax bracket (i.e. married, filing a joint tax return and earning less than $200,300 per year), this would provide you with a monthly deduction of $161.18 (or $1,934 yearly), and your real monthly payment would be only $414.47. (Note: Unless the money you borrow is used to improve your property, under current tax law you are only able to deduct interest in the first $100,000 when you refinance your current mortgage).
Many readers will challenge me. They will point out that it makes no sense to pay 5 5/8 percent on a mortgage and only be able to get 4 or 5 percent interest by putting the refinanced money in a savings account.
I do not disagree with this. But over the years, I have had too many clients from the old school who are "house rich and cash poor." They own their house free and clear but do not have sufficient money to pay the increasing real estate taxes or the insurance premiums. I firmly believe that everyone should have money in the bank -- even if it does not pay a lot of interest -- for that rainy day.
If you still want to pay off your mortgage, here's what you should do.
First, make absolutely sure that there is no prepayment penalty attached to your loan. Because your loan is so low -- and you have had the mortgage for a number of years -- I doubt that there is such a penalty, but you have to confirm this. When you first obtained that loan, you signed two important documents: a promissory note and the deed of trust (also known as a mortgage). The terms and conditions of your loan -- including any prepayment penalty -- will be spelled out in those documents. Read them carefully. If you have trouble understanding the legal language, discuss the situation with your lender or your lawyer.
You should send a formal written request to your lender asking for a payoff statement, and advise the lender of the exact date that you expect to send in your payment. The lender will advise you of the outstanding balance, and will also provide you with the "per diem" interest.
Mortgage interest is calculated in arrears. So when you make your February payment, for example, that will pay the principal and interest that accrued during the month of January. For most loans -- other than those insured by the Veteran's Administration (VA) -- you can pay off your loan at any time. Example: Assuming you made the February payment, the payoff statement will indicate the principal balance as of Jan. 31, and it will also tell you what the daily interest will be. Since you plan to pay it off on February 23, multiply the per diem interest by 23, and add this amount to the outstanding balance.
Keep in mind, however, that interest will continue to accrue to the time the lender actually receives your check. So I would add 10 additional days of interest, just to be on the safe side. All legitimate mortgage lenders will refund any excess payments to you.
If you have a mortgage insured by the U.S. Department of Veterans Affairs, to my knowledge that is the only loan that requires you to pay a full month of interest. In that case, try to coordinate your payment so that it reaches the lender by the end of the month.
What about any escrows that your lender is holding to pay real estate taxes and insurance? The payoff statement should advise you of the amount being held in escrow. Some lenders will deduct this amount from the outstanding balance; most lenders, however, will send you a separate check for this amount after you make your final payment.
And don't forget to advise both your real estate tax office and your insurance company that you will now be responsible for these payments. I recently represented a lawyer who paid off his loan, but forgot to advise the taxing authority. It was only when he learned that his house was about to go to tax sale that he was able to resolve the situation.
When you first got your loan, the deed of trust was recorded among the land records in the jurisdiction where your property is located. Now that you have paid off the loan, you want to make sure that it will be released from land records. Some jurisdictions require that a Certificate of Satisfaction be recorded, while others use a Deed of Trust Release.
Your lender will either arrange to record the release or will send it to you for recording. Either way, you want absolute confirmation that the release has been accomplished. This means that you want proof of recording, which you can get from your local recorder of deeds.
Finally, your lender should return the original promissory note, marked "paid and cancelled." The note is known in law as a "bearer instrument." This means that anyone who has that document could claim that you still owe the money. While this is not a major problem, since you will have proof that you paid off the note, why ask for trouble? Make sure that the lender returns the note to you.
Wednesday, April 30, 2008
Monday, April 14, 2008
Don’t be Fooled: Fence Sitters are Not Buyers
Dear friend/person who read something I was quoted as saying in the media/random blogger:
Thank you so much for your thoughts on the state of the housing market. I was most impressed with your emphatic declaration that real estate is currently overpriced and that the nearly 70 percent of Americans who own their own homes are "just a bunch of ninnies."
It is not always easy to be smarter than two-thirds of the country, but you, with your smug declaration that you would "continue renting till prices fall 50%" are clearly some kind of exceptionally far-sighted genius. The fact that you may have previously come to me as a potential client, only to be told that your target housing would cost five times your annual income, does not weigh in on this debate.
No, you may not have had the wisdom to pull your salary up or your desires down to get your income in line with a starter home; how could you have, when you were using that gigantic brainpower of yours to declare that home prices would keep falling till 2010? When I first got out of college I went to work on Wall Street. I missed the crash of '87 but was in the office for the mini-crash of '88, where grown men (and they were mostly men) who had been in the business for 20 years stopped what they were doing to gather around a computer screen. That was a bad market day, the kind we used to say would drive investors "out on the ledges." Well, clearly housing has cycles just as stocks. The fact that America's real estate is in a slide is best illuminated by the stat that last year home prices went down, the first decrease since the 30's. But it really doesn't mean that all market activity has ceased. Existing homes may be selling at a pace of only 5 million a year, but honestly, that's enough business for me that you can stop cracking jokes about m What's more, not all of those home sales are the painful struggles that you imagine them to be. I know I'm in the Northeast, which has been spared some of the pain, but things up here that are listed at decent prices still go pretty quickly. I listed my suburban house at 3 percent less than my Realtor advised — yup, I wouldn't sell outside of my own real estate territory, just like a doctor wouldn't cut out his own appendix — and I got an offer the week after I listed. But these are joys that you too can experience, the gut-wrenching thrill of watching neighborhood prices pop up and slide down, when you become a homeowner. Until then, don't act supercilious and tell me, "oh, everything's overpriced, I'm not a buyer." True, some listings are overpriced, but the ones that aren't are attracting people who have kids and need more space, or people who have to move for their jobs. I'm a homeowner because paying a mortgage is my way of hiding money from myself, and the monthly loan. Even as the market cycles up and down, I'm building equity, and in 30 years I expect to be richer than I am now. Even as the real estate market is getting stomped on, nearly 5 million people like me are around. You tell me at these prices you're not a buyer? Honey, you never were.
Alison Rogers is a licensed salesperson and author of "Diary of a Real Estate Rookie."
Thank you so much for your thoughts on the state of the housing market. I was most impressed with your emphatic declaration that real estate is currently overpriced and that the nearly 70 percent of Americans who own their own homes are "just a bunch of ninnies."
It is not always easy to be smarter than two-thirds of the country, but you, with your smug declaration that you would "continue renting till prices fall 50%" are clearly some kind of exceptionally far-sighted genius. The fact that you may have previously come to me as a potential client, only to be told that your target housing would cost five times your annual income, does not weigh in on this debate.
No, you may not have had the wisdom to pull your salary up or your desires down to get your income in line with a starter home; how could you have, when you were using that gigantic brainpower of yours to declare that home prices would keep falling till 2010? When I first got out of college I went to work on Wall Street. I missed the crash of '87 but was in the office for the mini-crash of '88, where grown men (and they were mostly men) who had been in the business for 20 years stopped what they were doing to gather around a computer screen. That was a bad market day, the kind we used to say would drive investors "out on the ledges." Well, clearly housing has cycles just as stocks. The fact that America's real estate is in a slide is best illuminated by the stat that last year home prices went down, the first decrease since the 30's. But it really doesn't mean that all market activity has ceased. Existing homes may be selling at a pace of only 5 million a year, but honestly, that's enough business for me that you can stop cracking jokes about m What's more, not all of those home sales are the painful struggles that you imagine them to be. I know I'm in the Northeast, which has been spared some of the pain, but things up here that are listed at decent prices still go pretty quickly. I listed my suburban house at 3 percent less than my Realtor advised — yup, I wouldn't sell outside of my own real estate territory, just like a doctor wouldn't cut out his own appendix — and I got an offer the week after I listed. But these are joys that you too can experience, the gut-wrenching thrill of watching neighborhood prices pop up and slide down, when you become a homeowner. Until then, don't act supercilious and tell me, "oh, everything's overpriced, I'm not a buyer." True, some listings are overpriced, but the ones that aren't are attracting people who have kids and need more space, or people who have to move for their jobs. I'm a homeowner because paying a mortgage is my way of hiding money from myself, and the monthly loan. Even as the market cycles up and down, I'm building equity, and in 30 years I expect to be richer than I am now. Even as the real estate market is getting stomped on, nearly 5 million people like me are around. You tell me at these prices you're not a buyer? Honey, you never were.
Alison Rogers is a licensed salesperson and author of "Diary of a Real Estate Rookie."
Monday, April 7, 2008
Home Inspector Banned by Seller's Agents
Don't buyers have right to select whomever they please?
By Barry Stone, Tuesday, March 11, 2008.
Inman News
Dear Barry,
Our Realtor recommended a home inspector who has a very good reputation for thoroughness and honesty. But the agent and broker for the seller have refused to allow that inspector on the property. They say the inspector is a "nitpicky deal-killer" and that their real estate office will not do business with him. They say I can choose any other inspector in the area, but not the one my agent recommended. Don't I have the right to hire a home inspector of my choice? --Andrea
Dear Andrea,
Your question raises two issues affecting the seller's agent and broker -- one of legality and one of liability. Let's begin with the legal question: whether you have the right to a home inspector of your choice. The answer depends largely on the wording of the purchase contract. Most real estate contracts contain clauses such as "inspector of the buyers' choice." If such wording is in your contract, the seller's Realtors would have no right to ban your inspector. If taken before a court of law, your choice would probably be enforced.
The other aspect of this issue involves Realtor liability. Regardless of the wording in the purchase contract, agents and brokers who restrict a buyer's choice of a home inspector make themselves liable for any defects that are not disclosed by the home inspector of second choice. What if the inspector who is allowed by the seller's Realtors were to miss a significant defect involving the foundation, roofing, electrical wiring, plumbing, etc.? The buyer could hold those Realtors liable for having prevented a more qualified inspector from evaluating the property. It could then be alleged that those Realtors were trying to limit the thoroughness of defect disclosure. In a case of that kind, the Realtors' legal defense might not play well to a jury.
In short, boycotting qualified home inspectors is an indefensible posture for real estate professionals. It increases liability, it is usually a violation of contract, and it demonstrates a lack of ethics by those agents who do it.
By Barry Stone, Tuesday, March 11, 2008.
Inman News
Dear Barry,
Our Realtor recommended a home inspector who has a very good reputation for thoroughness and honesty. But the agent and broker for the seller have refused to allow that inspector on the property. They say the inspector is a "nitpicky deal-killer" and that their real estate office will not do business with him. They say I can choose any other inspector in the area, but not the one my agent recommended. Don't I have the right to hire a home inspector of my choice? --Andrea
Dear Andrea,
Your question raises two issues affecting the seller's agent and broker -- one of legality and one of liability. Let's begin with the legal question: whether you have the right to a home inspector of your choice. The answer depends largely on the wording of the purchase contract. Most real estate contracts contain clauses such as "inspector of the buyers' choice." If such wording is in your contract, the seller's Realtors would have no right to ban your inspector. If taken before a court of law, your choice would probably be enforced.
The other aspect of this issue involves Realtor liability. Regardless of the wording in the purchase contract, agents and brokers who restrict a buyer's choice of a home inspector make themselves liable for any defects that are not disclosed by the home inspector of second choice. What if the inspector who is allowed by the seller's Realtors were to miss a significant defect involving the foundation, roofing, electrical wiring, plumbing, etc.? The buyer could hold those Realtors liable for having prevented a more qualified inspector from evaluating the property. It could then be alleged that those Realtors were trying to limit the thoroughness of defect disclosure. In a case of that kind, the Realtors' legal defense might not play well to a jury.
In short, boycotting qualified home inspectors is an indefensible posture for real estate professionals. It increases liability, it is usually a violation of contract, and it demonstrates a lack of ethics by those agents who do it.
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