Q – I know we waited too long to buy a home. My husband thought mortgage interest rates would come back down to around 7 percent. Instead, they went up to around 8.5 percent for a fixed-rate mortgage. We have a nice apartment at a fair rent, but our daughter is now 3, and she needs a yard for play. Do you think we should wait until interest rates decline before we buy a home?
A – No. There is no indication that mortgage interest rates will decline any time soon. Alan Greenspan thinks raising interest rates will prevent inflation, and he has no plans to reduce interest rates. If you wait to buy a home, you will lose out on the home ownership benefits.
Buy a home now, especially because the sales volume is slowing and sellers are becoming more reasonable with their asking prices. If you can get an adjustable rate mortgage with the interest rate locked in for three, five or even seven years, that could be a good deal. Just be sure it doesn’t have a prepayment penalty. If interest rates plummet, you can then refinance. If they don’t drop, you have a bargain mortgage.
Q – Some time ago you recommended home buyers obtain a professional home inspection. Should this be done before or after making a purchase offer?
A – After. Your written home purchase offer should contain a contingency clause for a professional home inspection.
After the seller accepts your purchase offer, be sure to accompany the professional inspector you hire, even if you must take time off from work. He or she will explain any defects discovered and the approximate repair cost.
Then you can take the inspector’s written report to the seller to obtain a credit for any serious defects discovered. But don’t nitpick and lose a desirable home over a few minor defects.
Q – About six years ago, my wife and I bought a townhouse in Naples, Fla., where we spend five or six months every year. We recently received an unsolicited offer from a neighbor’s friend, who wants to buy it. We are tempted to accept; however, we are concerned about that new $250,000/$500,000 home-sale tax exemption. What kind of proof will Uncle Sam require from us to demonstrate it was our “main home” for the “aggregate” 24 months during the 60 months before the sale?
A – So far, no U.S. Tax Court decisions have involved the new Internal Revenue Code 121 principal residence $250,000 tax exemption, $500,000 for a married couple filing jointly, which became law in 1997. The statute does not specify what information proves the residence was your “main home” or principal residence.
In what I think was a stupid move, in 1998 the IRS abolished IRS Form 2119 for reporting the sale of a principal residence. Now, if you sell your Naples home, which you think qualifies for the $250,000/$500,000 tax exemption, you don’t even have to report the sale on your income tax returns. Only taxable principal residence sales are now reported on Schedule D with other capital gains.
. My suggestion is to retain all records, especially utility bills, to prove the residence sold was your primary residence during the months you lived there.
Q – Homes are selling like hotcakes in our neighborhood. Regrettably, we must sell ours due to a job transfer. We’ve interviewed two Realtors so far. Both recommend we include a one-year home warranty as a sales inducement, even though it will cost us about $350. With homes selling so well in our neighborhood, don’t you think we should save the $350?
A – No. Listen to those smart real estate agents. One-year home warranties are a great idea for both sellers and buyers. They help prevent future disputes, such as when the dishwasher leaks the day after the sale closes and the buyer blames you for concealing the problem.
Although one-year home warranties on resale houses only include items such as wiring, plumbing, furnace, built-in appliances and the water heater, they give prospective buyers assurance. For an additional premium, buyers can usually insure the roof, air conditioning, swimming pool, plumbing outside the home’s perimeter and other components.
Q – A few weeks ago you ran an item from a home buyer who obtained 100-percent financing with an 80-percent mortgage and a 20-percent home equity loan from the same lender. Which lender is that?
A – Virtually every home loan lender now offers 97-percent Fannie Mae and Freddie Mac mortgages. In addition, several nationwide lenders offer 100-percent home loan financing in almost every state. Most local mortgage brokers can often arrange 100-percent home purchase financing, too.
From experience, I’ve learned that once I start naming lender names, I get swamped with ugly mail from other lenders who offer similar loan programs and demand equal space. Just start dialing for dollars. Check your phone book yellow pages under “real estate loans” to find the local 100-percent lenders.
Q – Last March I received an unexpected job promotion that required our moving. I had to start work in early April, so we didn’t have time to sell our home; however, we were able to rent our old house for about $100 per month more than its expenses. We got lucky and found a new house to buy here at a bargain price. If we decide to sell our old house, since it is now a rental and no longer our principal residence, can we still claim that $250,000 home-sale tax exemption you often discuss?
A – Yes. Internal Revenue Code 121 says that to be eligible for the $250,000 principal residence sale tax exemption, the owner must have owned and occupied it an “aggregate” two years during the past five years before its sale.
Presuming you lived in the house for at least two years and moved out on March 30, 2000, converting your former residence into a rental house at that time, you can rent it up to three years — until March 30, 2003 — without losing the $250,000 sale exemption, up to $500,000 for a married couple filing jointly.
There is no need to rush to sell the house. If residences are appreciating in that area, you might wish to keep it as a rental for a year or two while it goes up in value before putting it on the market for sale. However, all depreciation you deduct on your Schedule E rental income tax return will be recaptured and taxed at a special 25-percent federal tax rate at the time of the rental house sale. For further details, please consult your tax adviser.
Q – We have accumulated considerable credit card and other debt. As a result, we somehow got on the mailing lists of several mortgage lenders. They are eager to refinance our home loan with a new mortgage up to 125 percent of our home’s appraised market value, but they want 12.5-percent interest, plus various fees. They tell us that our debt will then become tax deductible as home mortgage interest since our credit card interest is not tax deductible. What do you think of this idea?
A – You are being misled by those mortgage salespersons. The Internal Revenue Code only allows home mortgage interest deduction on loans secured by your residence up to its market value, but not exceeding it, with a $1 million maximum deductible home mortgage.
In other words, interest on your home loan exceeding the residence’s market value will not be tax deductible. I am also concerned about that high 12.-percent interest rate. Unless you have bad credit, you can probably refinance your home loan for around 8 percent and then obtain a home equity loan up to 80, 90 or even 100 percent of your home’s value at around the prime rate.
Please shop among at least six mortgage lenders. You are to be commended for wanting to pay off your high-cost credit card debt, but a 125-percent home loan might not be the best way to do so.
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Write to Robert Bruss at Tribune Media Services, 435 N. Michigan Ave., Chicago, Ill. 60611
