Q: My company is offering an attractive early-retirement program that I want to accept. The only problem is our mortgage payment. We refinanced an adjustable-rate mortgage earlier this year to a 15-year, fixed-rate mortgage. I would like to use my severance package, the equivalent of about a year's pay after taxes, to pay down the mortgage. But I want the pay-down to reduce my monthly payments, not merely reduce the length of the loan. I don't want to go through another expensive refinance. Will my lender recompute my monthly payments without a full-scale refinancing?-- S.A.W .
A: The likelihood of getting what you want without a refinancing is not great. The vast majority of fixed-rate loans--up to 75%, according to some counts--are sold by lenders to the secondary mortgage market. Unless your mortgage lender is in the minority, it is probably not in any position to rewrite the terms of the note.
That said, there is still no reason you shouldn't at least try to get what you want. According to our experts, you should ask your lender for what is called a "modification of note." However, be advised that this document, which alters the terms of your repayment plan, is almost exclusively used when borrowers are facing financial problems and is not easily won as a simple substitute for a refinancing.
Further, if your mortgage was sold on the secondary market, its current holder would have to approve any new loan terms. Many do not. Still, if you can win one, a note modification will cost you only about $500.
More likely, your lender will require that you refinance your loan to re-amortize your reduced loan balance. This will cost you money--no matter how you handle it. You can either pay points, between 1% and 3% of your outstanding loan balance, plus charges of up to another $1,000, or you can pay virtually nothing and accept a mortgage rate about 0.5% higher than you would get if you paid the points and fees. Even if your lender agrees to a "streamlined" refinancing, you will still face most of the usual charges.
One of the downsides of a fixed-rate mortgage is that your payments are just what their name implies: fixed. No matter how much you pay down your outstanding loan balance, your extra cash only reduces the length that the loan will run. It cannot reduce your monthly payments.
Two States Take Bite of Taxpayers' Income
Q: In a recent column about partial-year income tax filings in two states, you said that taxpayers are not subject to double taxation. I beg to differ. We live in California and own income property in Arizona. We paid Arizona taxes on our investment there and took a credit for it on our California state taxes. Now we are told that the credit is not allowed, and we were slapped with a bill for $350 in interest on the back taxes. Can California really do that?--\o7 S.T.L\f7 .
A: First of all, let's explain the difference between partial-year filings and full-year filings in multiple states.
In the first instance, you are paying taxes on the income you earned while a resident of that state. For example, suppose you lived in California for seven months before moving to Ohio for a new job. California would want taxes on your income for the seven months you lived in the state, while Ohio would want you to file for the five months you were a resident of that state. There is no overlap--and hence no double taxation--because the filings cover only the period you are a wage earner in each state.
The issue affecting you involves full-year filings in multiple states. You owe taxes in both California and Arizona for income generated during the same year. Arizona wants the taxes because the money was generated in that state, while California feels entitled to a share because you are a resident of this great state.
Still, you should not be subject to double taxation, because you are allowed to deduct the taxes you pay in one state from your bill in another state. Usually, you make the deduction on the filing in the state in which you reside--just as you did.
So what happened? Arizona is one of four states--Oregon, Indiana and Virginia are the other three--with no reciprocity agreement with California. Instead of deducting your Arizona tax bill in California, you must deduct the taxes paid to California for your business in Arizona on your tax filing to the state of Arizona. This is exactly the opposite of what California residents normally do when making multiple state income tax filings.
What can you do now? According to the Arizona Department of Revenue, you should file an amended tax form as quickly as possible. Complete Form 140 NPR, paying particularly close attention to schedule CR. This will enable you to receive credit for your California tax payment from Arizona.
Now, the only question involves that nasty $350 interest bill. Can you get it waived? You can ask, but it's not likely. Ignorance of the law, just like mathematical errors, isn't usually excused.
401(k) Plan May Allow Loan Against Balance
Q: I am planning to withdraw some money from my 401(k) account to pay off my credit card debts. I understand that I will have to pay taxes and state and federal early-withdrawal penalties. Is there any other solution that is less drastic?--\o7 L.D.R\f7 .
A: How about getting a loan from your 401(k) plan? Some companies allow their employees to borrow against their account totals, a tactic that avoids both the penalties and tax implications of a withdrawal. Check with your personnel or employee benefits office to see if your plan permits loans; not all do.
There are limits to how much you can borrow against your 401(k) account before the loan is considered a taxable distribution. In general, the IRS lets you borrow 50% of the account balance, to a maximum of $50,000. If your account is small, you can borrow up to 100% of it, to a maximum of $10,000. And unless the loan was taken out to purchase a home, it must be repaid within five years.