Question: I'm a first time home buyer. Earlier this month I locked in a 3/1 adjustable-rate mortgage (ARM) with the mortgage broker. Because of delays (on my part) it is highly possible that the paperwork will not get completed within the 30 day lock. I've tried to educate myself in regard to ARMs vs. fixed-rate mortgages. Sometimes I'm completely comfortable with my decision to go ARM and other times I don't feel as confident. During the lending process, can I change my mind and go with a fixed-rate loan instead of an ARM? What about if the rate lock expires?

Answer: You locked in a particular loan with a given set of rates and terms. A fixed-rate loan, in your case, would be a different mortgage. This is somewhat like going to a car dealer, ordering a red sedan, and then seeking to buy a red coupe before the first car is delivered.

If the lock runs out and the loan cannot be delivered, then you might want to go for a fixed-rate mortgage.

You could cancel the ARM -- federal rules give you three business days to cancel a mortgage -- however, this is an extremely unwise choice because you may further delay closing, you may not qualify for the loan you want or you may face higher rates due to changing market conditions.

A larger issue may be this: Can you close on the home under the terms of the sale agreement? The loan delay may lead to a closing delay -- and that may lead to an assortment of problems and costs. Speak with your broker regarding the sale agreement and the status of your loan application.

Question: I own a small rental home. It was an inheritance from about 10 years ago. It was appraised at that time for $60,000. I plan to sell it for an asking price of $139,000. This money will be used to help my daughter purchase another home in the same area. Is there any way to avoid the sale tax since the money from the sale will be a gift to my daughter?

Answer: You could face significant capital gains taxes. The additional income from the sale might also qualify you for the federal alternative minimum tax (ATM) for still-more tax payments.

Rather than a sale, consider refinancing the property to take out cash or renting the property to your daughter at a fair market rental -- and then giving her a cash gift to cover some or all rental costs.

Question: How does financing your closing cost effect your mortgage when it's time to sell your home?

Answer: Loans are now available which pay for some or all closing costs. Closing costs are an expense, so borrowers have to pay those costs somehow. If not paid in cash at closing, such expenses can be paid in the form of a larger loan, a higher interest rate, or both.

If you borrow more money there is a larger loan balance. A larger loan balance means that monthly payments are increased and there is more to re-pay when the home is sold or refinanced.

If you pay a somewhat higher interest rate the size of the loan does not increase, but monthly payments will be higher than if closing costs were paid in cash. Particularly for those refinancing, this is an attractive approach if monthly payments decline.

In either case, be certain you have the right to prepay the loan, at any time, in whole or in part, and without penalty. Then -- if a better loan option arises -- it will be easy to consider refinancing.

Question: My brother bought a house four years ago. He lost his job a year ago, and I have been helping him with the property tax and mortgage payments. Since he doesn't work and thus has no income, he cannot deduct the interest and property tax. Can I deduct the interest and property tax on my income tax even though I don't live in that house?

Answer: You should be congratulated for helping your brother, but your good and generous deed will not be rewarded by the tax man.

The question is: What's your standing to earn a deduction? You do not own the property, you are not an owner-occupant, you have not co-signed the loan, you're not on the title or the loan, the home is not an investment on which you're trying to make a profit and you're not obligated to pay the debt. For details, see IRS Publication 530 and speak with a tax professional.

Question: My husband died in 1998. A few years prior to his death, he bought at auction a piece of property, hoping that a golf course would materialize nearby that would increase the property's value and afford him a profit. After his death, I continued paying taxes on the property, then decided to sell it. I had an appraisal done and discovered that there were "sinkholes" on the property and that its value had decreased. A couple years later, some brokers asked about the property and subsequently had perc tests done. Those tests revealed that the property would not perc; so the brokers declined to buy the property.

Subsequently, I contacted the county, the state, and the IRS seeking advice on disposing of the property. All stated that to get a tax loss I would have to give the property to a charity. I contacted state and county and national charities, to no avail. No one wanted it, and I didn't want to continue paying taxes on a losing investment. I therefore printed up a flyer for the neighbors telling whoever wanted it that I would transfer it over to them free. I have since given the property to a neighbor who lives across the street from it. Why am I not allowed to take a loss?

Answer: You made a gift of the property to a neighbor, not a donation, thus the gift is not deductible.

But instead of looking for a charitable deduction, ask your tax preparer: Given that you have abandoned an investment property, can you write off the loss as a business expense? Has the property been treated as a business in the past for tax purposes? Think of a stock that goes from $10 a share to zero and can no longer be sold.

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Published: April 23, 2004

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