QRecently you discussed a question from a reader whose mortgage lender offered to convert the loan to a biweekly mortgage for a $385 fee so the loan would be paid off more quickly to save interest. You suggested the reader avoid that scam and instead prepay the mortgage. Your answer said to divide the current monthly mortgage payment by 12 and add that amount to each monthly payment. This is the equivalent of a biweekly mortgage, you said, which equals 13 monthly payments per year. My question is: Should the "extra" payment be directed entirely to the loan principal (instead of principal and interest)? AYes. Of course. When a mortgage lender receives an extra partial payment, the lender presumes it is made to reduce the principal balance. However, as we know, many mortgage lenders are not very smart, so the borrower should clearly designate the extra payment is for principal reduction. I gave the example of a borrower with a $1,200 monthly principal and interest payment (not including property tax and fire insurance escrow impound). To get the mortgage paid off in 21 years or less, thus saving thousands of interest dollars, the borrower should divide the monthly payment by 12. This produces a $100 result in our example. The extra $100 principal payment should be added each month, thus resulting in a $1,300 monthly principal and interest payment. QMy mother died about a year ago. We were joint tenants on the title to her house, where I lived to take care of her. As I was a widow with a teenager, this arrangement worked out very well. Now I've met a wonderful man who asked me to marry him. He wants us to live in his home, and I agree. I have my mother's house up for sale. Last week, I talked with my tax advisor about the tax consequences of the sale. She said I have a "stepped-up basis" on the half of the house I inherited from my mother, but I will owe tax on the profit from the half I already owned. Does this sound right to you? AYes. Stepped-up basis becomes very important when receiving all or part of a property after a deceased owner's death. To illustrate: Suppose your mother's basis in the house was $100,000 when she added you to the title, and the house was worth $200,000 when she died. Since donees take over the donor's basis, your original basis was $50,000 for a 50 percent interest. When you inherited your mother's 50 percent interest as surviving joint tenant, the 50 percent received from her was worth $100,000 upon her death. Your basis is therefore $100,000 plus $50,000 or $150,000. If the house sells for $200,000 net sales price, only $50,000 is taxable capital gain. QOne of your recent articles mentioned 125 percent home mortgages. Why couldn't a person get the loan, make no payments, and lose the house by foreclosure? I'm retired and don't need good credit anyway. AThankfully, most people don't think like you do. If you're retired and don't have adequate income to repay the 125 percent mortgage, you probably can't qualify for this loan. But if you have good income and good credit, you can probably get a 125 percent mortgage. Lenders know most honest people who can qualify for the mortgage won't default. However, in many states a foreclosing lender can go after you for a deficiency judgment if you default on a hard-money mortgage like this.
Robert Bruss is a Bay Area real estate broker and attorney. His column appears the second and fifth Friday of the month. Send questions to Bruss care of Palo Alto Weekly, P.O. Box 1610, Palo Alto, CA 94302. On all tax-related matters, Bruss recommends that you consult your tax adviser for further details.
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