Can extra yearly mortgage payment cut loan term in half?

DEAR BOB: I was told a long time ago if you make one extrahome mortgage payment each year on a 30-year fixed-interest-rate loan, it willbe paid off in 15 years. If that is not true, how many years will it take offthe mortgage by making one extra payment every year? –Geri F.

DEAR GERI: Your information is incorrect. However, dependingon the interest rate on your mortgage, making an extra mortgage payment eachyear (13 payments in a 12-month period) will usually cut the term of your30-year mortgage down to about 22 years.

Purchase Bob Bruss reports online.

Of course, if you don’t plan to stay in your home that long,then there is little sense in making extra mortgage payments.

This is the same principle behind the biweekly mortgagepayments (which I do not recommend). Biweekly mortgages paid every two weeksare the equivalent of making 13 monthly mortgage payments each year.

An easy way to make 13 mortgage payments every year is todivide your monthly principal and interest payment by 12 (not including anyproperty tax or insurance escrow). Then add that amount to each monthlymortgage payment you make, clearly marked “extra principal payment.”The result will be to speed up your mortgage payoff and decrease the totalinterest paid over the life of the mortgage.


DEAR BOB: I have owned and occupied my home since 1973, butI am ready to sell and move into something smaller. My problem, if I sell now,is I will have an enormous capital gain tax. Could I rent out the house forseveral years, then sell it, and do an Internal Revenue Code 1031 exchange foranother property? Would this reduce my huge capital gain tax? –Sara G.

DEAR SARA: I presume “enormous capital gain tax”means your profit will exceed the $250,000 (up to $500,000 for a married couplefiling jointly) principal residence sale tax exemption of Internal Revenue Code121. To qualify, you must have owned and occupied your primary home at least 24of the last 60 months before its sale.

If you move out and rent the house to tenants, therebyconverting it to a rental, then you can make an IRC 1031 tax-deferred exchangefor another rental property of equal or greater cost and equity. You will thenforfeit your unused $250,000 exemption and you can’t take any cash out of theexchange.

However, after the trade is completed, you could refinancethe acquired rental property to produce tax-free cash. But when you eventuallysell that rental property, you will owe capital gain tax (unless you then makeanother IRC 1031 trade up). For details, please consult your tax adviser.


DEAR BOB: I have lived in my house for 12 years. On one sideof my property there is a concrete wall and chain-link fence that runs theentire length of the lot. I had always thought that was the property line. ButI recently learned the true boundary is about 5 feet to my side. In otherwords, the wall and fence are 5 feet within my neighbor’s side of the lot line.I have heard of “squatter’s rights.” Since I have mowed the grassalong my side of my neighbor’s lot, how do I get the property line moved? –TimP.

DEAR TIM: Squatter’s rights have nothing to do with yoursituation. That term applies to obtaining title to an entire property byoccupying it, such as moving into a vacant house. The legal term for squatter’srights is gaining title by adverse possession.

If I understand your question correctly, the fence is 5 feeton your neighbor’s side of the true boundary line. Because you have beenoccupying and using that 5-foot strip of your neighbor’s lot, you may beentitled to gain a permanent prescriptive easement.

The legal requirements for obtaining a prescriptive easementto permanently use part of another’s property include open, notorious(obvious), hostile (without permission) and continuous use for the requirednumber of years in your state. California has the shortest time limit of justfive years. Some states require hostile use for 20 or even 30 years.

If you meet the requirements for a permanent prescriptiveeasement over that 5-foot strip of land, please consult a local real estateattorney. To perfect your claim, you will need to sue your neighbor in a quiettitle lawsuit.

However, I must warn you the neighbor’s legal defense willbe “permissive use,” thus defeating the hostile use requirement.


DEAR BOB: My sister is going through a divorce. She hasmoved out of the house she shared with her soon-to-be ex-husband. He says hecannot afford to buy out her share of the property. Based on your excellentadvice in a previous article, I recommended she file a partition lawsuit toforce the sale of the house. I see no other way for her to liberate her shareof the equity, which she needs to buy a house or condo to live in. But she isconcerned he will have no place to live. However, I don’t see that as herproblem. He can take his share of the sales proceeds and buy another home. Whatdo you recommend? –Janet H.

DEAR JANET: You gave your sister good advice. Selling thehouse seems like the best choice for both parties.

As part of the divorce settlement, your sister’s divorceattorney should ask the judge for a court order to have the house sold and thesales proceeds divided equally between the co-owners.


DEAR BOB: My husband and I own several rental properties asjoint tenants with right of survivorship. Over the years, we have takendepreciation deductions on these properties. If we sell them, I understand theIRS will “recapture” the depreciation and tax us at the special 25percent tax rate. However, should one of us die, will the survivor receive thedeceased spouse’s half without having to pay a depreciation recapture tax?–Merle S.

DEAR MERLE: Yes. Death is the ultimate tax shelter from bothcapital gains tax and the depreciation recapture tax. The surviving jointtenant will receive a new stepped-up basis for the property. For exact details,please consult your tax adviser.


DEAR BOB: Three years ago, my mother married a widower. He toldher that upon his death she would get 30 percent of the house he received afterthe death of his previous spouse. The remainder will go to his son andgrandson. She is not on the title. Since she lives in California (a communityproperty state), won’t she get either 50 percent or the entire house? –LeslieLeB.

DEAR LESLIE: No. Inherited property is the separate propertyof its owner, even if that owner is married. Your mother’s husband can leavehis separate property by will to whomever he wishes.

Only if community property assets were used to maintain theproperty, such as making mortgage payments, maintaining it, or making capitalimprovements from earnings after the marriage, could a spouse acquire acommunity property interest in a spouse’s separate property. For full details,please consult a California tax adviser or estate planner.


DEAR BOB: If we sell our rental property, can we use theInternal Revenue Code 1031 tax-deferred exchange to acquire another rentalproperty in Germany? –Mary P.

DEAR MARY: No. Internal Revenue Code 1031 tax-deferredexchanges only apply to U.S. real estate. For details, please consult your taxadviser.


DEAR BOB: Nineteen years ago my live-in boyfriend and Ipurchased a condominium as tenants in common. He paid the down payment andclosing costs. We lived together in the condo for a year before he moved out.After over 15 years without a word from him, he has surfaced and wants me tobuy him out or sell the condo. He has never paid a penny toward the condo, notone mortgage payment, tax, condo assessment, improvements, or other expenseseven when he lived with me. I stayed in the condo and view it as my home. Whatis a fair way to determine a return on his investment? –Diana B.

DEAR DIANA: Ask him what he wants. It might be less than youexpect. If his number is not acceptable, make him a counteroffer. That’s theway negotiation works. When you reach an agreement, to prevent anymisunderstanding or change of mind, then put it in writing signed by bothparties.

Bear in mind, however, he can bring a partition lawsuit toforce the sale of the condominium under a court order. If he does that, it isup to the judge to decide what is a fair division of the sales price,considering you paid all the payments but he made the down payment. Fordetails, please consult a local real estate attorney.

The new Robert Bruss special report, “How to BuyFixer-Upper Houses with Little or No Cash for Fun and Fortune,” is nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant Internet delivery at Questions for this columnare welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center

Copyright 2006 Inman News

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