How can mortgage balance grow instead of decline?

DEAR BOB: We look forward to your educational andentertaining columns. But now we have a real estate problem we never expected.About a year ago, we bought our home with the help of an adjustable-ratemortgage at 1.95 percent interest. We knew it would adjust after six months to4.95 percent interest. That was quite a jump in our monthly payment, but wehandled it. However, when we received the lender’s Internal Revenue Service1098 year-end report, we learned our mortgage balance has grown by about$7,800. When I called the lender, I was told the increase was “unpaidinterest.” What’s that? –Jerry G.

DEAR JERRY: The lender should have explained the 1.95percent “teaser” interest rate and your current 4.95 percent interestrate don’t fully pay the ARM interest rate, which probably adjusts monthly,earned by the lender. The unpaid interest you didn’t have to pay was added to yourmortgage’s principal balance each month.

Purchase Bob Bruss reports online.

This is called “negative amortization” because youaren’t paying the full amount of interest earned by the lender.

The result is you are not building any equity by reducingthe mortgage balance, which is growing each month instead of slowly decliningas with an amortized mortgage.

Negative amortization ARMs keep your monthly payments low.Hopefully, your home’s market value appreciates faster than your mortgagebalance increases. Now you know why I never recommend negative amortizationARMs.


DEAR BOB: My husband and I have a life estate in a60-year-old house. We can live in it until we both die. However, the house isnot in good condition. It has dry rot, mold, and an infestation of ants. Whatconcerns me, since my husband’s daughter is his conservator who will receivethe house after we’re both dead, if I survive my husband she could have methrown out for “waste,” as you described in a recent article. Myhusband’s family is nice enough to me now, but things could change if he diesfirst. –Nancy H.

DEAR NANCY: I think you’re really asking, “Whodetermines if ‘waste’ of a property is sufficient to terminate a lifeestate?”

If the remainder-man (your husband’s daughter) becomesalarmed at the lack of maintenance of the house, which she will possess afteryou both die, she can bring a lawsuit for “waste” to terminate thelife estate. It is then up to the court to determine if the life tenant isallowing the house to badly deteriorate (called “waste”) and if thelife estate should therefore be terminated.

I suggest you avoid discussing the condition of the housewith the daughter and do your best to maintain it, especially to have the antsexterminated. For more details, please consult a local real estate attorney.


DEAR BOB: My wife and I, in our 70s, are considering areverse mortgage. We own a free-and-clear condo worth about $500,000. However,it is in a small complex of only three units. We have been told our unit won’tqualify for a reverse mortgage. Is this true? –Gene B.

DEAR GENE: I suggest you consult a representative whohandles FHA, Fannie Mae, and Financial Freedom Plan reverse mortgages to see ifyour situation qualifies with any of these lenders. Generally, FinancialFreedom Plan is the most flexible. The best place to find local reversemortgage originators is on the Internet at


DEAR BOB: My fianc?e and I both own homes. We want to sellhis, after meeting the 24-month requirement for ownership and occupancy toqualify for the $500,000 tax exemption. He has lived there about 10 years.Other than being married in the year of the sale, how do I prove two years ofoccupancy? Must I live there full-time? After the two years are over, I wouldlike to move back into my own home. My CPA says I don’t have to live there atall. We need the full $500,000 exemption. –Bonnie T.

DEAR BONNIE: My first suggestion is to fire that CPA forgiving bad advice. Your future husband already qualifies for his $250,000principal residence sale exemption of Internal Revenue Code 121 because heowned and occupied his home 24 of the 60 months before its sale.

However, if you are to qualify for an additional $250,000exemption you must occupy the home as your principal residence at least 24 ofthe 60 months before its sale. If you are not married on the date of the sale,then your name must have been on the title at least 24 months to qualify.

But you indicate you will be married by the date of the saleof his house. In addition to proving your 24 months of occupancy, you must alsofile a joint tax return in the year of sale. For more details, I suggest youconsult a new tax adviser.


DEAR BOB: When I die, I want to leave my home to my fouradult children. If I take my name off the title and put their four names on thetitle now, will this action avoid probate when I die? I can’t afford one ofthose revocable living trusts you recommend. –Josephine A.

DEAR JOSEPHINE: Your plan could be very bad for you and youradult children. By deeding your house to your children now, you give upcontrol.

For example, suppose your health declines and you need tosell the house to provide funds for your care in an assisted living orconvalescent home. If you give away the house now, you won’t have it availableto sell when you need its cash proceeds.

Yes, deeding the house to your adult children now avoids theneed for its probate after your death. But the gift does a disservice to thembecause they will take over your presumably low adjusted-cost basis. When theyeventually sell your home, they will probably have a substantial capital gaintax to pay.

A simple living trust prepared by an attorney shouldn’t costmore than $1,000, possibly much less. With a living trust, you can maintaincontrol of your home while also providing for avoidance of probate costs anddelays when you die. Details are in my special report, “24 Key Questions:Living Trust Secrets Reveal How to Avoid Probate Costs and Delays,”available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or bycredit card at 1-800-736-1736 or instant Internet delivery at


DEAR BOB: Last August my fianc?e and I bought a housetogether with equal ownership. Both names are on the title and the mortgage.The lender’s IRS 1098 form we received for 2005, however, lists both our namesbut only her social security number, although I am the person who made all themortgage payments. The bank says they can’t change the social security numberfor 2005, but they will do so for 2006. What should I do? I tried contactingWells Fargo Mortgage but they are impossible to reason with. –Lorne C.

DEAR LORNE: Don’t worry. Claim down. Because you paid the2005 mortgage payments and you are on the title to the house, you are entitledto deduct the mortgage interest you paid (and the property taxes if you alsopaid them).

Although it is very unlikely the IRS will audit you on thisissue, be prepared to show your canceled checks or other evidence of mortgageinterest payments. Of course, be sure your fianc?e doesn’t claim the sameinterest deduction on her tax returns.


DEAR BOB: About six years ago, I deeded the title to myhouse to my son and daughter-in-law. Now they are getting a divorce. Although Ihave a life estate in my house so they can’t kick me out, the daughter-in-lawwants half the value of my house in the divorce settlement. Is this legal? CanI get my house back? –Harold V.

DEAR HAROLD: Anything can, and frequently does, happen indivorces. This situation shows another reason why it can be a major mistake togive property away before death.

If you signed an irrevocable deed, you can’t get the titleto your house back. But the valuation of the house in the divorce settlementwill be decreased from fair market value because of your life estate. However,the court will surely consider the daughter-in-law’s remainder share of thehouse in the divorce settlement.

The new Robert Bruss special report, “How to Sell YourHouse or Condo for Top Dollar With or Without a Real Estate Agent,” 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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