REA Prepayment penalty may be best option
By George Karvel
Knight Ridder/Tribune News Service
Q. About 1 1/2 years ago, expecting that mortgage rates were near the lows, I refinanced an existing loan, accepting a two-year prepayment clause.
With rates now significantly lower, what are my options? I can pay the penalty, but only if I can amortize the cost over a long enough period. I can seek a long-term lock-in, but no lender seems interested in such a long term (most say that they have never heard of such a long-term lock-in). I can wait until closer to the expiration of the two-year period (early 2004). -- W. Westphal, Indianapolis
A. There is nothing I can suggest. You have clearly stated your options. Although there is some risk to waiting, I do not expect interest rates to increase dramatically between now and early 2004. If you are not comfortable waiting, include the prepayment penalty in your refinancing. In that way the cost will be amortized over the life of your new loan.
Q. I have what's called a borrowing pit behind my land. A company comes and digs out a side of a hill and takes the dirt somewhere else. That leaves the side of the hill bare.
Now when it rains I get all their trash and all the orange water coming down to my land. It's got a ravine cut so deep across my property that a full-grown man can stand in it and just barely be seen. Also I'm afraid that my kids or someone's kids might get caught in it. I hired a lawyer but all he's done is take my money.
By the way, the company that owns this pit is a major company in Tennessee. I've talked to the owner, and he has told me it's been doing this for 20 years and it'll be doing it another 20. -- Darryl Blackwell, Ooltewah, Tenn.
A. Runoff and flooding of adjacent land by an adjoining user is not acceptable and likely to be in violation of any use permits allowing for the adjoining gravel operation. I suggest you contact your county commissioners and the county attorney with regard to violation of any ordinances governing any runoff.
Similarly, I would speak to officials at your state Department of Natural Resources and state Pollution Control Agency. They do not permit gravel mining runoff to be contaminating land or the waterways into which the silt and clay drains. You will be doing yourself and your fellow citizens a favor by following up on this issue.
Q. My friend Scott in California e-mailed me about his title insurance.
My question is: Are there exclusions and limitations on title insurance policies and shouldn't the purchaser of the policy, even if they aren't the insured, have some indemnification?
If I read this stuff correctly, it seems that the title company says the bank is the insured and Scott has no protection for a lien that the title insurer didn't discover. -- Reathel Giannonatti, Mentor, Minn.
A. Your friend has received a responsible and professional answer from the title company. There are two categories of title insurance; one is a lender's title policy the other an owner's. The former insures the lender against loss in the event of a defect in title and must be purchased as a requirement of obtaining a mortgage loan. The owner's policy is optional and protects the owner's equity interest due to title defects.
When the title is flawed resulting in a loss of value to a home, the first monies from a resale are paid to cover the mortgage loan. If there is insufficient money to pay the mortgage loan, the lender's title policy pays for any loss. The loss of owner's equity is not covered by the lender's title policy.
Q. I would prefer not to consult a lawyer unless absolutely necessary as that would escalate this issue: My father left a vacation house to my two siblings and I. (Already you see the problem.)
For various reasons, I do not want to be involved with the two of them in this house. They refuse to buy me out and they are now contemplating extensive renovations and are expecting me to pay one-third of all costs involved.
Is there any way they would have to buy me out? Could my one-third share be sold to anyone else? -- M. Prattson, Windsor, Conn.
A. You can sell your interest to anyone who would buy it. But who would want to own a noncontrolling interest in a cabin with two strange families? Although you can sell your interest, I don't believe it is marketable. In other words, no one would buy it except for a nominal price.
If you wish to force a sale and purchase of your interest you must do what you don't want to do: Hire an attorney. Discuss with the attorney the possibility of a forced sale and partition of the proceeds. Absent a forced sale, and failure to pay for your share of expenses and capital improvements, your interest in the property will be diluted. Your siblings would be able to recover their investment before any proceeds from eventual sale would be distributed to you or your estate. This is also an issue that should be discussed with your legal adviser.
Q. We read your article about capital gains going down to 20 percent. Did we understand this correctly? We've sold a condo in March for $157,000 that we bought five years ago for $59,000. We were under the impression that 28 to 33 percent would be the capital gains cut. We like the idea of 20 percent much better. Can you clarify? -- Pat Capece
A. No capital gains are paid on a primary residence, but they are paid on other investments, such as a second home.
The maximum capital gain tax rate has been at 20 percent for some time. If a taxpayer's regular tax rate is 15 percent, the capital gain tax rate is 8 percent for the sale of property held for more than five years; 10 percent for property held more than one year but less than five years. When a taxpayer's regular tax rate exceeds 15 percent, a 20 percent tax rate applies. To ensure the proper tax is paid, you or your tax preparer need only follow the instruction for Schedule D.
George Karvel is holder of the distinguished chair in real estate at the University of St. Thomas, St. Paul.