Question: I just joined a major lender and I've been told that most of our mortgages are scheduled interest. This means if a borrower pays additional principal one month it will be taken off the back end of the loan and the prepayment will not change the loan's amortization schedule. Is this true or just bad information to get people into our simple interest loans?

Answer: The lender is correct and there's nothing wrong with what is being said.

Let's say you have a fixed-rate $100,000 loan at 6.5 percent over 30-years. The monthly cost for principal and interest will be $632.07.

Now, let's say that the borrower makes a $50 prepayment every month. Here's what happens:

First, all REQUIRED monthly loan payments stay the same. The required monthly payment does not decline. The borrower is still obligated to pay at least $632.07 per month.

Second, the loan will have a shorter term because of the prepayments. The mortgage in this example will contract from 360 months to 292 months (24.33 years).

Third, the potential interest cost over the life of the loan will fall from $127,544.49 to $84,564.44. ($682.07 x 292 less the $100,000 principal).

In effect, prepayments mean there is less principal. The required monthly payments mean the amortization schedule is being speeded up. The result is a shorter loan term and less potential interest.

But what if the loan is refinanced after 10 years or the home is sold? What then? Less is owed to the lender so the borrower gets a bigger check at settlement.

One other point: If prepayments are made with an ARM, then if the interest rate remains steady monthly payments will decline a touch when the loan is next re-set because there will be a smaller principal balance.

Question: I am a real estate broker. We listed a lot and have now dropped the price to a point where it is below what the client paid for it more than two years ago.

The client called today and told me all his friends are telling him to "walk away" rather than sell at a loss and still pay commission. If he does walk away, won't his lender still want the difference between what they can sell it for and what he owes? The client says "no, once they foreclose, it's their problem."

Answer: You are right to be concerned.

Your client needs to check the rules in the state where the property is located. As the loan secures property which is not a residence, most probably the mortgage is a "recourse" mortgage, meaning the lender can sue for any unpaid balance.

No less significant, the lot owner's credit will be in the dumper for several years, meaning that his cost to borrow -- if he can borrow -- will be substantially higher than someone with good credit.

Lastly, this is not the lender's problem. The lot owner bought property with the understanding that the lender would be repaid. There is a financial debt here, one that the borrower would be elated to pay if the value of the property increased. However, the lender would not share in that increase -- and the lender should not be asked to share in the loss, either.

Question: Three years ago, we were approached by a friend of over 20 years about purchasing a second home that she owns. She would do this on a land contract, being friends so long we did not draw paperwork up, but there are witnesses that heard the conversation. She had us paying the whole payment to the mortgage company through her. She then quit making the payments, and yesterday she served us with bankruptcy papers, which I imagine is because of all the work we have invested in this house. I have before, during and after pictures of this. Do we have any claim for the investments we have made in this property?

Answer: This is like a deal with family, something is bound to go wrong without paper. As much as you love "Uncle John Doe" get business agreements in writing.

What you may have, sort of, is an "equitable interest" in the property. This is less than recorded ownership and not clearly the case in your situation.

In recent years some states have moved to give greater protections to land contract buyers. However, you may not have a land contract as you have nothing in writing. Moreover, even if you had a written land contract -- something which is really an installment sale -- you may not be able to obtain title until some or all payments have been made.

Since the owner is in a bankruptcy situation, you may be regarded as a creditor by a court -- which means you may get cents on the dollar once secured claims are settled. Whether you can file any successful claim for the work you have done at the property is unclear because it may be determined that you merely made "leasehold improvements" and such improvements can be regarded as the property of the landlord.

You should never have been in this position. For instance, you could have bought the property and financed the sale by having the owner take back a mortgage or with a regular mortgage -- thus there would be no land contract and no dependence on the owner to make mortgage payments. If you could not afford the purchase price, then this is a transaction that was destined to fail and should not have been started.

Please see a local attorney for specifics.

Question: Why was I told I had to hold property I exchanged for five years?

Answer: It may be that some personal use of the property is involved. In 2004 the rules regarding 1031 exchanges were revised. Previously you could obtain an investment property through a 1031 exchange, rent it for a time and then live in it for two years as a personal residence. In basic terms you would then have paid no income tax on the profit from the exchange and the replacement property plus, as a personal residence, you could shelter up to $500,000 in capital gains profits when you sell. The 2004 rule said you have to own the replacement property for at least five years to make this work.

Executive1031.com offers this example: "A taxpayer sold their rental house two years ago, completed a simultaneous exchange, and moved there last month to occupy it as their principal residence. Under the new law, they will have to wait three years before selling the property and excluding gain under IRC 121."

For specifics, please see a tax professional.

Question: I'm about to buy a home and will be given a limited warranty deed. I am told that it has back taxes that have to be paid by a specific time. Is it possible to have the back taxes removed after purchase or does that mean I am open to other claims?

Answer: A "limited" or "special" warranty deed says the owner is selling the property with good title but with encumbrances such as unpaid taxes.

An offer can be written to require the owner, as a condition of the sale, to pay all outstanding property taxes. Typically there will be "adjustments" at closing so that property taxes are paid or credited up to the date of settlement.

Why accept a special warranty deed? Did you get a discount or other benefit by not demanding a general warranty deed?

Please have a real estate attorney review the matter for specifics.

Question: I'm a real estate salesperson and have decided to change companies at year's end. I like the company, I'm quite successful and I have been here for a number of years, but I have a personality clash with my manager. How can I politely and graciously walk away and leave the door open in case I want to return should they ever replace the manager?

Answer: By any chance, does your company have multiple offices? If yes, perhaps go elsewhere within the company.

It's best to leave on a positive note, to say that after a given number of years it's time to try something else, to thank everyone and to recognize that there's a lot of mobility within real estate.

Question: I purchased a pre-sale ocean front condo due to close end of the year. Due to market conditions the appraisal is coming back over 100k less than I agreed to pay for it. Financing due to this substantial decline is very hard to get. I was wondering is this a common problem during this declining market?

Answer: You have a situation which is entirely common in many markets. The real question is what does your purchase agreement say? For instance, are you obligated to buy the unit if interest goes above a certain percentage? Or if you do not qualify for financing? Or if the unit does not appraise for the full sale value? Have a real estate attorney look at your agreement.

Question: I need a safe loan for a single mom. My husband came back from Iraq and told me he wants a divorce. One of our children is also in Iraq, another is on a mission with our church and the youngest lives with me. My children and I need a home. Can you guide me to low-interest loans with which we can rebuild our lives?

Answer: As you are in the process of divorce you do not want to purchase a home without the advice of your attorney. In some circumstances you may need a written agreement so that your husband will not have a claim against the property if it is purchased prior to a final divorce decree.

As to low-cost mortgages, state programs are generally available to "first time" buyers. By this term the states typically mean someone who has not had title to a home for the past three years. You should speak with lenders to determine if there is an exception for divorce that might allow you to quickly obtain financing under these programs.

In addition, you should speak with leaders within your church to see if they have any programs or contacts which may be of assistance in your situation.

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