Q–Would you explain how a borrower can figure out a mortgage principal prepayment schedule. Even my lender says it is too complicated to come up with a regular monthly dollar number because it changes every time a principal prepayment is made.
A–Thank you for giving me a chance to talk about one of my favorite topics, saving interest dollars by increasing your monthly mortgage payment slightly.
I`m worried about your lender if he can`t calculate the interest savings if you will increase your monthly mortgage payment. It`s so simple even I can determine the numbers in less than a minute.
For example, suppose you have a $50,000 home loan at 12 percent interest amortized over 30 years at $514.30 a month. Multiplying $514.30 by 360 payments you can see you`ll pay $135,148 in interest, plus the $50,000 principal, over 30 years. But if you increase your monthly payment by just $50 a month to $564.30, you cut the mortgage from 30 years to 18.25 years. More important, you`ll slash the interest to $73,581.70, saving $61,566.30 interest by reducing the mortgage`s life by about 12 years.
How did I calculate this? On my $29.95 financial calculator. Just be sure it has keys labeled for loan amount, interest, term and payment. Also, most have other keys for future value, principal paid, interest paid and annual percentage interest rate, but you won`t need those. After you have one of these business calculators, just follow the instructions to work out your own mortgage prepayment plan to save thousands of dollars.
Q–Is it ever possible to take an income tax deduction on the negative cash loss difference between rent collected and mortgage payments? The only writeoff I know of is the interest and property tax and insurance if they are included in the mortgage payment. We have been buying rental houses for several years and have attended many real estate seminars but nobody talks about this topic.
A–Please run, don`t walk, to a good tax adviser`s office as you apparently are missing the major tax advantages of owning rental property.
Your negative cash flow rental property loss is tax deductible. But, of course, the mortgage principal payment is not tax deductible. Since you didn`t mention depreciation, I hope you haven`t overlooked that major deduction, too. By the way, it doesn`t matter if the property tax and fire insurance payments are collected with your mortgage payments; they are always deductible for income property.
To illustrate, suppose you own a rental house rented for $600 a month or $7,200 a year. If the monthly mortgage interest, property tax and fire insurance premium expenses total $700, that`s $8,400 annually. Therefore, you have a $1,200 annual negative cash flow.
You will probably have other deductible expenses such as repairs and painting. You also will have a non-cash expense deduction for depreciation
(wear, tear, and obsolescence of the building). Let`s suppose depreciation is $5,000 a year. Adding the $1,200 negative cash flow and the $5,000 depreciation deduction produces a $6,200 annual loss.
Q–I have been avidly following your running battle with the mortgage lenders about taking advantage of the 10 or 15 day ”grace period” allowed for most mortgage payments. As you do, I always pay my mortgage payments on the last day of my 15-day grace period. My home mortgage payment is $752 which I keep in my interest checking account which earns 9 percent interest. If I keep the $752 in my interest checking account 15 extra days each month, that`s 180 days a year I`m earning interest on my $752. That`s only $34 extra interest I earn each year but I also pay about $2,000 a month mortgage payments on my rental properties so the extra interest I earn adds up. Do you think this hurts my credit rating in any way?
A–No, although some mortgage lenders will tell you otherwise. Most of the credit rating companies such as TRW and CBI only report lender`s payments more than 30 days late.
However, it does not pay to use the 10 or 15 day grace period if the mortgage is of the ”simple interest” variety. These loans, often used for improvement loans and second mortgages, have interest computed daily until the payment is received. To save interest, these simple interest loans should be paid on the due date, or before.
Please note: Real estate laws differ from place to place, and laws of your area should be checked before making decisions on real estate problems. Robert Bruss will answer inquiries addressed to Tribune Real Estate Features Service, P.O. Box 6710, San Francisco Calif. 94101.
