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Real Estate Mailbag

Don't count on lender to extend interest-only mortgage

Q: My mortgage terms allow me to pay interest only for the first five years. If I am current with my payments, will my lender extend the note?

A: Several years ago, when property values were increasing rapidly, lenders would have been willing to renew your loan. But things have changed. Interest-only, 100 percent mortgages are one of the major causes of the current mortgage meltdown. No one is eager to continue writing these loans.

I strongly urge you to refinance now. Your payment may increase, but in five years there's no telling whether you'll be able to get a new loan or what the rates or terms will be.

If your loan comes due and your house declines in value, no lender will lend you enough money to pay off a loan that exceeds the value of your home. Most lenders will now lend you only up to 90 or 95 percent of the appraised value.

Mortgages have financial benefits

Q: I'm hearing a lot about how owning is more expensive than renting. But no one discusses the positive tax consequences of owning. My husband and I would be paying close to $20,000 additional income tax each year without the mortgage interest deduction. (We wouldn't be able to itemize deductions without it.) Am I missing something, or is it just that for many people the mortgage interest doesn't make as much of a difference in their tax bill?

A: You have raised a very significant issue: Should you get a mortgage or pay all cash?

I have to disagree with your statement that no one ever discusses the tax consequences of ownership. Most financial columnists — and all mortgage lenders — tout the benefits of being able to deduct your mortgage interest when you file your annual income tax return. In my opinion, it makes no sense to own your house free and clear unless you have enough money stashed away and are comfortable that you will be able to financially cope with emergencies that may arise in the future.

Let's face it, however. If, for example, you are in the 28 percent tax bracket, for every dollar that you pay in interest to your mortgage lender, only 28 cents is deductible. The remaining 72 cents is just coming out of your pocket. But, as you suggest, if you did not have this deduction you would not be able to itemize. That's one clear advantage.

Perhaps the most significant advantage is that the money you have invested in your house is just dead equity. If your house appreciates in value, it would do so regardless of the amount of your equity. If your house depreciates, the equity is also going to go down.

Why not use this cash for other purposes? Or just put it in a safe, insured investment for a rainy day.

Benny Kass can be reached at benny@inman.com.

Don't count on lender to extend interest-only mortgage 05/23/08 [Last modified: Friday, May 23, 2008 4:30am]

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