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Your Mortgage : IRS Reason for Long-Term Loans

March 04, 1990|Special to The Times

QUESTION: Recently you told a reader it is smart to get the biggest long-term mortgage available. You prefer 30-year mortgages over 15-year loans. But it seems to me a large down payment with a small mortgage for 15 years is better because of the interest cost saving. Why are you pushing the big long-term mortgages?

ANSWER: Uncle Sam makes me do it. The 1987 Tax Act makes it advantageous to obtain the largest available home "acquisition mortgage." Interest on such a loan up to $1 million is tax-deductible. Incidentally, home buyers have up to 90 days after their purchase to restructure their financing and qualify the loan as an acquisition mortgage.

In addition to deducting the interest on an acquisition mortgage up to $1 million, homeowners can deduct interest on a home-equity loan up to $100,000. But interest on any amount over $100,000 is not tax-deductible.

Now I hope you understand why I advise obtaining the largest available home mortgage and making the smallest possible down payment. As for taking a 30-year mortgage instead of a 15-year mortgage, I advise doing so because the payments are much smaller. If a homeowner wishes to pay off his loan quickly, he can pretend it is a 15-year mortgage and make the equivalent 15-year loan payment every month. However, if they should become unable to pay that large amount they can then drop back to their much lower regular payment at the 30-year rate.

Mortgage Refinance Cash Is Not Taxable

Q: I have about $75,000 equity in my home and am considering refinancing my mortgage to reduce its interest rate, switch from an adjustable- to a fixed-rate loan, and take out some of my equity to use for investing. If I do this, will the additional funds I receive be taxable?

A: Many people are refinancing their home loans for exactly the reasons you listed.

With mortgage interest rates coming down, this is a good time to shop for mortgage refinance funds. Borrowed money is not taxable because it must be repaid. Please consult your tax adviser for further details.

Why Won't Lender Let Mortgage Be Assumed?

Q: We are selling our home. Our buyer wants to assume our 12% fixed-interest rate mortgage. However, it has a due-on-sale clause that the S&L lender absolutely refuses to waive. That seems like stupidity to me. No wonder the S&Ls are going broke. Is there any way we can get the S&L to allow our buyer, who has excellent income and credit, to assume this mortgage so we can carry back a second mortgage behind it?

A: Since the old mortgage has a due-on-sale clause, the lender can call the loan if the title to the home is transferred without the lender's approval. I agree that it is stupid not to allow your buyer to assume that loan, especially since you will be carrying back a second mortgage, which will make that first mortgage even safer.

Perhaps if you contact the S&L president you might get approval. It won't hurt to ask. Unfortunately, although your loan is serviced by a local lender, it has probably been sold in the secondary mortgage market to a big impersonal lender like Fannie Mae or Freddie Mac which have instructed their loan servicers to enforce due-on-sale clauses no matter how high the yield might be on a loan.

Is the U.S. Causing S&Ls to Go Broke?

Q: I resigned about six months ago from the board of directors of a small S&L that has been in our town for about 35 years. It has always been very well managed and produced a nice profit every year for the stockholders.

But in the last few years the federal regulators became very demanding as to loan documentation and capital requirements, even though we have only a few bad loans. Then the feds told us we had to raise more capital and could only loan a certain percentage of assets to our big customers such as home builders, even though we had no liquidity problems and nobody was doing anything wrong.

Just a few weeks ago, the feds took over management of this S&L and wiped out the stockholders' equity. I understand this is happening all over the country as the feds impose harsh, unreasonable rules on S&Ls. I would like your opinion as to what the federal government is trying to accomplish?

A: It appears that the federal government is trying to force many S&Ls to close. I regret what is happening in the S&L industry because the result is a major source of home loan financing is drying up.

Fortunately, many banks are stepping in to make real estate loans, but the number of lenders seems to be diminishing.

Although a few S&Ls were badly managed, it appears the feds have gone too far in taking over too many S&Ls. The poor management of the Resolution Trust Corp. (RTC) shows the feds can't manage much better. You were smart to resign when you did.

Carry-Back Mortgage: Seller Helps Finance

Q: Several times you recently said a buyer who wants to buy a home with little cash should find a seller who will carry back the mortgage. Please clarify what that means.

A: A carry-back mortgage, or a take-back mortgage means the home seller will help finance the buyer's purchase.

Instead of the buyer borrowing money from a bank or S&L to buy the home, the buyer borrows from a seller who carries back a first or second mortgage.

To illustrate, suppose you have $10,000 for a down payment on a $100,000 home. It has an assumable $50,000 VA first mortgage.

That leaves a $40,000 finance gap that the seller can fill by carrying back a $40,000 second mortgage.

The happy result is that you buy the home for a modest down payment, assume the first mortgage and the seller receives a handsome interest rate on the second mortgage.

Questions and comments may be sent to the Real Estate Editor, Los Angeles Times, Times Mirror Square, Los Angeles 90053.

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