Q–To qualify for the new $250,000/$500,000 home sale tax exemption, must we (1) live in the house at least two years as our principal residence and (2) own the home at least five years? In answer to another reader, you said only two years of home residency and ownership is required. Please clarify.
A–New Internal Revenue Code 121 says the home seller must have owned and occupied the “principal residence for periods aggregating two years or more” during the five years before the sale. That means if you bought your principal residence as recently as 24 months ago and lived in it during that time, you can now sell it and claim the $250,000 exemption ($500,000 for a married couple filing jointly). There is no five-year ownership requirement. Your tax advisor has complete details.
Q–What is the difference between a reverse mortgage and a home equity loan? Are they the same thing?
A–No, they are vastly different. If you are at least 62, a reverse mortgage can pay you monthly income as long as you own and live in your home. You do not have to make any monthly payments to the lender. The monthly payment to you is based on your age and the market value of your residence. It can also provide for lump sum payments, to pay, for instance, for home repairs. When you die or sell your home, the reverse mortgage balance is paid off and the remaining proceeds go to you or your heirs.
To qualify for a reverse mortgage, you must own your home free and clear (or nearly so). You need not qualify on the basis of income or credit. The three major nationwide reverse mortgage lenders are FHA, Fannie Mae and Transamerica.
By contrast, a home equity loan is secured by your residence and you must make monthly payments to the lender. Your income and credit are very important qualifying factors. If you are at least 62, need income, but have limited repayment resources except your home equity, a reverse mortgage is the answer to your problem.
Q–Our mortgage lender, Home Savings of America, is transferring the servicing of our loan to a company we’ve never heard of. Although HSA claims the terms of our loan won’t be altered, we are unfamiliar with the customer service of this new company and object to the change. We have stated our objections in letters to both companies. Is there anything else we can do to prevent our loan from being transferred?
A–I agree with you it is most unpleasant to have your home mortgage loan servicing transferred, especially to a loan servicer in another state. But it’s one of those unpleasant circumstances we have to live with. The sale of mortgage servicing is a multibillion dollar industry.
In your case, Home Savings of America, one of the nation’s largest lenders, saw a big profit opportunity and took advantage of it. If your new loan servicer is out-of-state, be sure to demand its credentials for servicing loans in your state. If it is not a bank or S&L, it must be properly licensed in the state where your real property is located. Also, if you really want to intimidate the new loan servicer, ask for their street address in your state for service of summons.
Q–We have lived in our current home over five years. We are considering temporarily renting it when we leave this area to take advantage of the current rise in home values, which we think will continue for a few years. If we rent our home for the next one to three years, will we still be eligible for the new $250,000/$500,000 home sale tax exemption? Will our eligibility change if we buy a new principal residence while we are rent out our old house?
A–As long as you meet the principal residence requirement of Internal Revenue Code 121, by occupying the home two out of last five years before its sale, you’ll still be eligible for the $250,000/$500,000 tax exemption. Buying another principal residence won’t affect your eligibility. Please consult your tax adviser for details.
Q–I recently received a quote from a mortgage broker for refinancing my home mortgage to take advantage of the current low interest rates. In the list of estimated closing costs was an item called “waive escrows” for 0.25 percent of the loan amount. I was told the $197.50 charge had to be paid up-front to the lender for the privilege of not setting up an escrow account for the property taxes and fire insurance. I was told all mortgage lenders do this to recoup what they lose on non-escrow mortgages. This really stinks. Is this true?
A–No. Your lender has dreamed up a new mortgage “garbage fee,” which you should be able to negotiate away by refusing to pay. If the other terms of the quoted mortgage are satisfactory, tell the mortgage broker you’ll take the loan, but you expect the mortgage broker to pay that unnecessary garbage fee to “waive escrow.” If the mortgage broker refuses, shop elsewhere for your mortgage.
You are obviously very smart. As a regular reader of this column, you know it is to your advantage not to have a mortgage escrow for monthly payment of one-12th your property taxes and fire insurance premium. It’s best to pay these bills yourself when they come due. Lenders are notorious for overcharging on tax and insurance escrows. However, VA, FHA and PMI (private mortgage insurance) mortgages require escrows.
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Please note: Real estate laws vary from place to place. Be sure to check the laws of your state and municipality before making decisions on real estate matters. You may need to consult a lawyer.
Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611.
