Question: I guess most people consider negative amortization to keep their payments low. We are considering it because we want to take advantage of a low interest rate and pay off our mortgage faster. My husband and I are considering refinancing our current 5 percent ARM (with two years left on the locked rate) to a negative amortized ARM. We are doing this because the loan being offered allows us to make up to $24,000 in additional principal payments a year without any prepayment penalties.
It seems to us with this loan we would enjoy the lower interest rate (about 3.1) and still be able to make a sizable reduction in the principal annually. Any reaction?
Answer: Yes. You have two years to go at 5 percent with your current financing and then it adjusts. Are prepayments allowed with the current loan?
As to the new loan, how long does the lower rate last? If it only remains in place a year and then increases above 5 percent, are you ahead?
Also, is there a better place to put your prepayment money such as a reduction of credit card debt?
Question: I plan to sell my house soon. I am thinking of upgrading the kitchen to granite counter top and stainless steel sink, which will cost about $4,000 in total. Do you think it's wasting of money to replace the current ceramic counter top and porcelain sink? Will I get most of my money back when I sell the house?
Answer: If you're going to spend $4,000 to fix up the kitchen because it's pleasing to you and you were going to stay on the property, then a "yes" would be easy. However, the real question is different: Will the suggested improvements help you sell the home for a better price?
To answer this question, visit nearby open houses and see how they compare. Also speak with local real estate brokers. Not spending for improvements you don't need, if you don't need them, is the equivalent of increasing your sale profit by $4,000 in this case.
Also, the basic rule for buyers is that they seek the least expensive home in the most expensive neighborhood they can afford. Will your up-grades move the property to the top of the local price pyramid -- and thus make the home more difficult to sell?
Question: My wife and I have owned our home for a little over two years. We paid $111,000 for the house and our interest rate is 5.6 percent. My wife already wants to buy a bigger house. We can afford a considerably bigger home, but I am trying to convince her that we would be much better off to stay where we are for at least two or three more years to build-up equity. We could realistically make double payments on our home after this year without any problem. Should we move?
Answer: You have owned a home for a year. The probability is that if you moved instantly such equity and appreciation as you have earned in the past year would be largely lost or totally lost. Thus there is a good case for staying.
Why is it that a larger home is desired? Is there a feature the present home now lacks? If the reason to move is ego or status, then caution is appropriate.
Perhaps the answer is not to move or not move, but to invest. If you have the dollars to comfortably afford another property, perhaps that would be the better choice -- something that produces rent and offers the possibility of appreciation.
Question: We own and have lived in a small house on a lot of land continuously for the last eight years. Given the hot real estate market, the value of the land now greatly exceeds the value of the dwelling.
We would like to knock down the dwelling which is old but not condemnable, build an entirely brand new house on the lot, and then immediately sell the house with the lot.
Are we eligible for the $500,000 capital gains exclusion? We have lived on the land for the past 5 years, but at the time of sale, will not have ever lived in the actual physical dwelling as it would be brand new.
Answer: The new home is an "improvement." The core point is that you lived at a given address for two of the past five years.
Imagine that before selling you added a new kitchen. You never used it, but the new kitchen made the property more attractive and so you got a higher price. Would there be any bar to taking the deduction if you met the five-year ownership and two-year use tests?
Before going further, and before tearing down anything, speak with a tax attorney, CPA or enrolled agent.
Question: I am looking to move out of state and before I do I would like to know the property tax law in some of the states I've considered. Where would I find property taxes for each state?
Answer: There are property taxes at the state level -- however there may also be additional property taxes and other levies for cities and counties. For this reason the best approach is to contact a local broker , suggest a home price and then get a tax estimate.
Question: I'm considering using the 1031 rule to purchase a new investment property. My question regards the eventual sale of that property. What are the capital gain implications if I move into that property and use it as a personal residence for at least two years?
Answer: The government says that if you acquire a property through a 1031 exchange, use it in business or trade, and then use it as a personal residence, you may be able to also qualify for a residential write-off if you own the property for at least five years under IRS Revenue Procedure 2005-14 .
The rules for such write-offs are both tricky and complex. Please consult with a tax professional for details.
Question: Can anyone steer me to a report that will tell me the U.S. real estate appreciation rates by state for the last 15 to 20 years?
Answer: Most probably your best choice would be to contact state property tax officials and state broker organizations. As well, you're onto a good idea -- but perhaps an idea which needs clarification. Let me explain:
Looking at national price changes for real estate provides a general gauge of value shifts, however when such changes are reported in cash terms they should be corrected for inflation to show real gains or losses.
Even when corrected for inflation, national price levels may not reflect local trends. Thus, state figures are a better option -- that's the good idea.
However, in the same way that national figures do not necessarily reflect local trends, the same is also true of state figures. The results in Cincinnati and Cleveland may be different even though both cities are within one state.
Going further, the results within a region may can vary. In the Washington, DC metro area, as an example, prices for like properties in the city, northern Virginia and nearby Maryland can all differ. The result is that tracking prices on a national, state and even regional level may useful for general commentary but insufficient to reflect your specific market interests, that house on Elm Street or the apartment complex downtown.
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