Q–Each month I pay $46 for PMI (private mortgage insurance) on my home, which I bought with a 10 percent down payment about 11 years ago. When I called my mortgage company to ask how I get my PMI canceled, the clerk said it can’t be done.
Is this true? I estimate I have at least 25 percent equity as I’ve made considerable improvements and homes have appreciated in my area. I feel this $46 is a waste of money. Can I just stop paying it?
A–When a home buyer purchases with a mortgage over 80 percent of market value, most lenders require borrowers to pay for PMI to insure the riskiest part of the loan over 80 percent. But as time goes on, the loan balance is paid down and most homes appreciate in market value. As in your situation, the loan-to-value ratio eventually drops below 80 percent.
If your mortgage was sold in the secondary mortgage market to Fannie Mae or Freddie Mac, they require their loan servicers to drop PMI when the loan-to-value ratio declines below 80 percent. However, the borrower must pay for a new appraisal (a very worthwhile expense). Ask your lender who owns your loan today. If it’s Fannie or Freddie, you’re lucky.
But in the absence of a state law requiring PMI cancellation, if your lender insists you keep the PMI, there isn’t much you can do except refinance with another lender. I hasten to add FHA mortgage insurance cannot be dropped. VA doesn’t charge for its loan guarantee.
Congress is considering legislation to require lenders to conform to the Fannie Mae-Freddie Mac PMI standard. Write to your congressperson and senators if you favor such a law.
Q–My husband and I own a 75-acre farm. We have three children. Our 22-year old son wants to buy the farm with owner financing from us. Is owner financing a good idea? Is it smart to overfinance with a relative?
A–I presume you have confidence your son can operate the farm. If his ability and commitment are questionable, let him operate the farm for two years before selling to him with seller financing.
An installment sale is an excellent idea. It can provide steady income for you and your husband with no work. You will also get tax deferral installment sale benefits. However, if your son resells at a profit within two years after the sale, that profit is taxed back to you as a close relative.
But I don’t understand why you want to overfinance for more than the farm is worth. That would raise your potential profit tax and cost your son extra interest and principal. Please discuss this sale with your tax adviser or attorney before proceeding.
Q–I bought my home in November 1992 and financed with a 7.5 percent interest rate mortgage for the first five years. Since then I have rented the house to tenants.
My mortgage lender is already sending me expiration notices as the balloon payment comes due next November. What should I do to refinance with the best interest rate? Should I get a fixed or adjustable rate? My friend says let the loan expire and it will automatically change to an adjustable rate.
A–Your friend may be correct. Now is the time to contact your lender to get written information about what will happen if you don’t refinance elsewhere. If the mortgage rolls over into an adjustable rate, ask for details such as the index and margin so you can compute if it’s a good deal.
One problem to anticipate, since you don’t live in the house, is that you won’t get the lowest interest rate if you refinance. If you’re planning to live in the house, moving in before refinancing would be very smart.
Q–My wife and I are retired and both over 55. We recently bought a Florida home for about twice the value of our “up north” home, which is paid for. Did we lose our “over 55 rule” capital gains tax break?
A–If you didn’t sell your “up north” home, there’s no tax due. However, if you’re thinking of selling it, and you owned and lived in it any three of the five years before sale, you can still qualify for the “over 55 rule” $125,000 home sale tax exemption.
But you don’t need to use this rule if you bought your Florida home of equal or greater cost within 24 months before or after the sale of your former principal residence. This is the “rollover residence replacement” rule of Internal Revenue Code 1034, available to home sellers of any age.
Q–My wife and I are not yet 55, but we are considering selling our home. We bought it over 20 years ago and will have at least a $175,000 net sale profit. I had to retire on disability at age 50 but am in reasonably good health.
Our idea is to travel for a year or two without being tied down to a house. However, we’re reluctant to sell our home until we know if Congress will pass Clinton’s $500,000 proposed home sale tax exemption. What would you do in our situation? Should we wait to sell?
A–Unless I had to sell my home, I would not put it up for sale today without qualifying for either the “over 55 rule” $125,000 exemption or the “rollover residence replacement rule.”
Since your situation is not eligible for either tax avoidance rule, presuming you don’t plan to buy a replacement principal residence of equal or greater cost within 24 months before or after the sale, you can’t be sure if Congress will pass that $500,000 proposed exemption.
One way to delay a sale would be to lease the house with an option to buy, setting the option exercise date after Dec. 31, 1997 or the effective date of federal tax law exempting home sale profits from tax, whichever comes sooner. Your attorney can provide further details.
———-
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
