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Question: Do interest-only loans make sense?
For instance, if you had a $100,000 loan and paid $900 a month for 60 months that would equal about $54,000 paid in -- with only about $5,000 going to principal and $49,000 being interest.
Alternatively, I have been told you can get an interest-only loan for 2.45 percent. If I paid only interest I would pay about $310 a month. I could then take the $590 difference, say 60 x $590 or $35,400 and pay all of that and reduce the principal. On the typical interest-only loan can I do the above?
Answer: Interest is essentially the cost of renting money. When you have an interest-only loan the mortgage balance is not being reduced -- thus the lender has more risk and interest rates will be higher, not lower, than with a self-amortizing loan.
As this is written fixed-rate financing is available at roughly 6 percent interest. That means with a $100,000 loan over 30 years the monthly cost for principal and interest is $599.55. On an interest-only basis the monthly loan payment would be $500.
After five years with a self-amortizing loan you would have paid approximately $29,000 in interest and reduced your loan balance by nearly $7,000.
Be aware that with interest-only financing the principal balance will not decline. At the end of the loan term you will owe the full amount of the original debt -- not good news if interest rates rise, your ability to refinance falls or home prices decline.
As to that 2.45 percent rate, such an interest level in today"s market sounds like a "start rate" for an adjustable-rate mortgage (ARM) and not the interest level for a 30-year loan. Ask yourself: Why would a lender provide money at 2.45 percent for 30 years when the same money can generate 6 percent? After the start rate is done, what is the interest rate? What is the maximum interest level?
At the very least, please speak with several lenders to review a range of financing options.
Question: I was made aware of your Web site in the June 2003 issue of Money magazine. I would like to know how to get more information on buying rentals while tapping the equity in other rentals I already own.
Answer: There are three essential ways to free real estate equity for other purposes.
First, you can sell investment property -- but then you will face taxes on your sale profits as well as marketing and closing costs. In effect, selling is an expensive way to free equity.
Second, you can exchange rental units on a tax-free basis for other real estate with greater potential for gain and income. Exchanges are complex and you will need assistance from brokers, attorneys and tax professionals.
Third, you can refinance investment property that has appreciated with a larger loan. The additional capital received at closing can be used to acquire another rental. Lenders can help determine which loan options are best in your situation.
Question: We just sold a duplex we owned this past Friday. I phoned the utility company to have final readings done this coming Monday. I was told that the new owners have not called to have accounts established in their names. Our broker told me that I cannot have the utilities turned off because of liability purposes. Is there a time frame to have the utilities transferred before I can turn them off?
Answer: What do you mean that the property has been sold? If there is a contract to purchase the property but no closing then title has not been transferred and you are still the owner. If there has been a closing it is possible that title will not be transferred in the local records for several days which means you are, again, still the owner. Until title is transferred according to the public records you should maintain all utilities as well as insurance coverage.
Do you pay utilities for the tenant unit or units at the property? If yes, your broker is providing important advice -- shutting off the utilities could be seen as a constructive eviction and lead to serious problems with your renters.
A typical real estate agreement will have a clause providing for "adjustments" at closing, including utilities. Thus the matter should be automatically resolved at settlement.
Question: I found a house I like that has been treated for mold. Will it come back? Is it safe to buy this house? Will I NEVER be able to sell it?
Answer: It"s not possible to comment with regard to a specific property, but in general not only will mold come back, it"s there right now. Like oxygen, mold is with us always. According to the Environmental Protection Agency: "It is impossible to get rid of all mold and mold spores indoors; some mold spores will be found floating through the air and in house dust."
The real question is whether the mold at this particular property represents a health hazard. Contact your local health department for information.
If there"s mold there must be moisture. Stopping leaks will reduce opportunities for mold to develop and that may be a key to selling in the future.
Question: I am separated from my husband and would like to buy a house. When we divorce could he still get half of my house?
Answer: You are married -- there has not been a final divorce settlement. Marital property laws vary by state, so you need to speak with a divorce attorney to determine what rules apply and whether your now-husband will have a claim to the property.
As well, because you"re married, if you buy a home at this time there are several special issues to consider such as title (How will you own the property?), wills (What happens if you die before the divorce?), taxes (Do you now file separately or together?), etc.
Have a real estate question? Send your inquiry to
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. Because of the volume of mail received, Mr. Miller cannot respond to questions individually or privately. Published letters may be edited for space and style. For comments regarding other Realty Times articles, please contact individual authors by pressing here.
This column is designed to provide accurate and authoritative information in regard to the subject matter covered. It is made available with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If legal services or other expert assistance is required, the services of a competent professional person should be sought.