Q–We owe about $160,000 on our home mortgage. It has a 7.25 percent fixed interest rate, so we’re not thinking of refinancing. My husband recently received a $45,000 bonus from his employer for outstanding 1997 sales performance. We’re debating if we should use this money to pay down our home loan. The house is worth around $250,000. Should we pay down our mortgage? I’m worried that if we don’t, we’ll spend the money on nonessentials.
A–You have a substantial equity in your home and a very attractive mortgage interest rate. I would not rush to pay down that mortgage. Investing the $45,000 elsewhere, such as in successful mutual funds, could be a more profitable alternative.
The big drawback of paying down your mortgage is that the money is not quickly available if you need it for an emergency or investment opportunity. Refinancing a home loan can be time-consuming and expensive. However, an alternative is to pay down the mortgage but obtain a home equity credit line now so you can easily reborrow the money, if needed, by writing a check.
Q–A few years ago we carried back a $47,000 second mortgage when we sold our home. The buyer makes his payments every month with no problems. But I need about $35,000 so I can make a down payment on the building where my business is located.
I’ve talked with several mortgage brokers, but all they will give me is about $25,000 for my second mortgage, because it has only an 8 percent interest rate with 12 years remaining. My bank won’t make me a loan secured by this mortgage. Do you have any ideas?
A–Offer that $47,000 mortgage as all or part of your down payment on the building you want to buy for your business. Mortgages are customarily traded at their full face value without any discount when used as a down payment. Emphasize to the building’s seller not only the excellent payment record of your borrower, but also the fact that 8 percent is a good return.
Q–I’m in the process of buying a condominium as my first home. When I asked my real estate agent about insurance, she said I need a homeowner’s insurance policy. But the insurance agent I phoned, the one who sold me automobile insurance, says I only need a condo owner’s insurance policy. He says I don’t need fire insurance. Who’s right?
A–Your insurance agent is correct. Condo owners do not need a homeowner’s insurance policy because the condo homeowner’s association, not you, pays for the fire insurance. Condo owners’ insurance policies are much less expensive than homeowners’ policies.
A condo owner’s insurance policy insures you for liability to others and damage to your condo and its contents by fire, theft and water damage. Incidentally, water damage–caused by water getting into your condo from another unit or an outside wall–is one of the major losses on condo policies.
Q–I own two rental houses, which I want to turn over to a professional property manager while I live in Europe for two years. The lowest fee quoted is 10 percent of the gross rents, plus a leasing fee for any vacancies. Most want fees of 12 to 15 percent of gross rents. Isn’t this rather high?
A–No. The professional property management fees you were quoted are typical for small residential rentals. Many property management companies don’t want to bother with such properties.
If you had a large apartment complex, you could probably get the management fee down to around 5 percent. But the time involved managing your two rental houses justifies the 10 to 15 percent fees you were quoted. Be sure to check the firm’s references to help select the best one.
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Have a question about real estate? You can write to Robert Bruss in care of Tribune Real Estate Features Service, 435 N. Michigan Ave., Suite 1400, Chicago, Ill. 60611. Answers will be provided only through the column. Please note that laws vary from state to state and area to area. Consult an attorney for specific legal advice.
