Q–The interest rate on our fixed-rate $47,650 home loan is 13 percent;
our home is worth at least $90,000, so I don`t think we would have any trouble refinancing to get a new mortgage. I understand new home loans are available for around 10 percent interest. Please tell us if we should refinance our home loan now?
A–The savings from refinancing a home loan can be dramatic. But shopping for a new mortgage can be traumatic. Before making a decision, talk to at least two S&Ls, two banks and two mortgage brokers before deciding which loan is right for you.
The general rules for refinancing a home loan are (1) the new interest rate should be at least 2 percent lower than the old interest rate and (2) the cost of getting the new loan (appraisal, loan fee, title fee, etc.) should be repaid from the monthly payment savings within three years.
Let`s see if your situation meets these criteria. First, you said you can get a new home loan for about 10 percent interest, so you pass the first test. I presume this is a fixed-rate loan, rather than a risky adjustable interest rate mortgage. Most home loan borrowers today prefer fixed-rate loans, and I agree fixed rates are usually best for most borrowers. But when a new home loan has an adjustable interest rate, now around 9 percent in most cities, it`s difficult to evaluate your interest savings because of the unknown risk of possibly increasing interest in future years.
The second test (recovering the loan costs from payment savings within three years) requires a little math. Although you didn`t give your current monthly payment, let me estimate it at about $553 for a 30-year, 13 percent $50,000 original mortgage. A new 30-year $50,000 loan at 10 percent fixed interest will cost $439, so your monthly payment savings will be about $114.
Over three years the payment savings total $4,104. Since the costs of getting the new loan probably won`t exceed 4 percent of the loan amount
($2,000), your refinance plan also passes the second test.
Since you have plenty of equity you may wish to borrow more than $50,000 to provide cash for home improvements, investments, or cash savings for emergencies (except in Texas where homestead laws interfere).
Q–We live in a 20-year-old home subdivision where the CC and Rs are very strict. For example, they require the lawns to be mowed or the homeowner`s association can have the lawn mowed and the owner billed. Until two years ago an old lady ran the homeowner`s association with an iron fist. She was mean and nasty but the neighborhood looked beautiful. When she died, her daughter was elected as the new president but she doesn`t enforce the CC and Rs. Our problem is a neighbor wants to build an addition on the front of his house. He has obtained a city building permit. This addition meets the city`s rules but it doesn`t comply with the 40-foot CC and R setback from the street. All the neighbors are upset but the city refuses to enforce our 40-foot setback because the city only requires a 20-foot setback. What can we do?
A–CC and Rs refer to ”conditions, covenants, and restrictions”
contained in property deeds. They are usually implemented by the developer when a new subdivision is created.
As you discovered, these CC and R ”private ordinances” are only as good as their enforcement by the neighboring property owners who have the same CC and Rs in their deeds. If the community homeowner`s association refuses to enforce the CC and Rs on behalf of the owners, then your alternative is to sue your neighbor in court to enforce the CC and Rs. Consult a real estate attorney for details.
Q–Some time ago you wrote about how to earn high yields by purchasing discounted mortgage investments. But please explain how state usury laws affect the 20 to 30 percent yields available from buying existing mortgages at a discount.
A–State usury laws have no effect on investments in discounted mortgages. The borrower continues paying a legal interest rate on the loan but the discounted mortgage investor can legally earn 20 percent or more on the dollars invested and need not be concerned about the usury law.
Q–I bought a small apartment building on Sept. 20, 1985. In preparing my 1985 income tax returns I read the instructions for IRS form 4562 for accelerated depreciation. It says to use 18-year depreciation. But several times you have referred to 19-year depreciation for buildings bought after May 8, 1985. I know you say to never rely on information obtained from the IRS but I phoned them anyway. After waiting a long time on ”hold” the clerk told me I must use 19-year depreciation but she said the IRS has not yet come out with the new tables. She said to use the 18-year table published with form 4562 and adjust it. But she couldn`t tell me how to make adjustments. What should I do? A–As of this writing, I am also told the IRS has not yet published the 19-year accelerated depreciation percentages. I find that shocking because thousands of realty buyers, including me, need that simple information from the IRS.
Since the difference between 18 and 19 years is very slight, nobody knows if the IRS will round off the percentages (as was done in the past) or use decimals. If the IRS doesn`t publish the 19-year table by April 15, 1986, I`m going to adjust the 18-year figures to ”guesstimate” the 19-year percentage for my acquisitions since May 8, 1985. That`s your alternative too.
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.
