Home & Garden

Extra toward mortgage pays off

Q: I own a home. In 2004, I refinanced and got a $200,000, 15-year loan at 5.25 percent. For one year I paid an extra $500 per month. I now owe $125,000. I am still paying 1/12 of the payment each month. I am not sure how many years I have left at this point due to all of my prepayments. I want to pay the house off in the next five years. How much do I need to add to my monthly payment in order to pay off the house in that time frame? Also, do lenders allow biweekly programs? I just send in payments twice a month.

You haven't quite provided me with all of the information I need to calculate exactly what you have to do to pay off your loan in the next five years, but I've pulled some general numbers that I think will help you figure out what's going on.

First, congratulations on prepaying your mortgage. You're doing a great job of building equity in your home. If you prepaid an extra $500 per month on your $200,000 loan at 5.25 percent, it would take you four years to pay down the balance to $125,000. Since you're about four years into your loan term, I'm guessing that you've actually been paying $500 per month all this time, not just for one year. That's how you'd get to about $125,000.

If you only prepaid the loan for one year, I'm wondering if you made any extra prepayments on top of that amount. Going forward, if you paid the $500 monthly plus $1,607 per year, that works out to $634 per month. At that rate, you'd pay off your loan in around nine and a half years, depending on when you made the extra $1,607 payment (I calculated it as if you added an extra $634 to each monthly payment, although if you paid the $1,607 in January of each year, you'd pay off your loan slightly faster).

Since you got your loan in 2004, you'd pay it off in 2013, or about five years from now.

If you paid a total of $750 extra per month, you'd pay off your loan about six months faster. If you upped your monthly pre-payment to $1,000, you'd pay off your loan in about eight years total.

When it comes to biweekly payments, many lenders will charge you to set that up. But you can make any prepayments yourself, without paying a fee.

There are accountants and others who might be able to audit your mortgage account. They would look at all of your prepayments and calculate for you with greater specificity what you would need to pay going forward in order to pay off your loan when you want.

Good luck in reaching your goal.

House as gift

Q: We are builders and we have a buyer who wants to buy one of our houses as a gift for his brother. He is giving us earnest deposit checks for less than $10,000. Are there any problems with this?

From your perspective, you need to follow your sale of the home as you would any other sale. You and your buyer should sign a purchase agreement for the sale of the home. If the buyer wants to designate a different person to receive title to the home upon settlement or closing, you should specify that in your contract. Your real estate attorney should review your contract and documentation to make sure you have done things right.

When you go to settlement or closing, you would treat the transaction in the same manner as any other. Your documentation would show the sales price, and the costs to close the transaction would be the same. If you are required to disclose the sales price and pay any transfer taxes, you would pay the amount owed based on the sales price of the home.

Your buyer would pay all expenses based on that purchase price. And if your buyer designates his brother as the owner of the property, you might need your buyer and his brother to sign the various documents required for settlement or closing. You need to remember to keep all of the papers in a file for the transaction, report it and handle it as a sale, as you would any other one of your sales.

You'd be doing your buyer a favor by suggesting that he may want to discuss the situation with his attorney, tax preparer or estate planner. Your buyer's gift of the home to his brother would likely result in your buyer having to report the gift to the IRS. The gift may or may not benefit him in the long term, depending on his estate plan and how much money he has.

If your buyer is trying to transfer some of his wealth to his brother, there may be far better ways. By consulting with a competent estate planning attorney, your buyer may find other opportunities to transfer his wealth while benefiting his estate plan.

Can I be sued?

Q: My parents – for estate planning purposes – have transferred the title of their main residence and summer house to me. I am wondering if I could be sued, should anyone be hurt on their (my) property. Do you have any recommendation as to how to handle these two properties?

I wish parents would stop transferring title outright to their kids, for estate planning or other purposes. It can cause several other serious issues.

First, there are the tax issues. If you give someone anything worth more than $12,000 in a single year, you have to file a gift tax return with the IRS. Any gift amount over the limit reduces the amount you can later pass down tax-free in your lifetime. I don't know the value of your parents' two properties, but I'm guessing it's in excess of $12,000, $24,000 (if each of your parents gave you their share), or $48,000 (if both of your parents gave $12,000 value each to you and your wife).

The second tax issue is that when title is transferred, you receive the properties with the current cost basis. In other words, if the properties cost $25,000 to purchase 40 years ago but are now worth $1 million each, you get them with the $25,000 cost basis. If you turn around and sell them, you'll pay capital gains tax at 15 percent plus state tax. If you inherit these properties, you'd get them at their $1 million cost basis. If you turned around and sold them, you probably wouldn't owe a dime in taxes.

What could your parents have done? They could have set up one of many types of estate planning mechanisms, including trusts, to have the properties transfer to you upon their deaths or even during their lifetime.

Please find a knowledgeable real estate attorney and tax adviser who can help create a solid real estate investment strategy for you to follow.