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posted: 6/23/2012 4:57 AM

Extra mortgage payments may be a smart move

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Q. To settle an argument with my brother-in-law, let's assume I have some money to invest. Is it still a good idea, in today's difficult real estate market, to send in extra money to pay off my mortgage quicker?

A. First off, no particular financial move is good for everyone. The answer depends on many factors: the stability of your job, whether you have emergency savings stashed away, and perhaps most important, whether you're paying high interest on credit card borrowing.

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But in general, if you have, for instance, a 5 percent mortgage, then every extra dollar you send in to reduce the principal debt saves you five cents a year from then on. That's a 5 percent return, no risk, guaranteed, which is terrific investment income these days compared to less than 1 percent on bank savings accounts.

You wouldn't want to tie up extra money in your house, though, until you had set aside enough cash to cover several months' possible emergencies. And if you're paying high interest on credit card borrowing, you'll get an even better return by applying your extra cash to reducing that debt. Only problem is, you must then resist the temptation to run your credit card balance back up again.

Q. A few years ago, our real estate salesman told us the only way we could sell our home in a hurry was to finance it ourselves. The buyer paid us a small down payment and is now making monthly payments to us. We in turn pay the bank that holds the mortgage.

Our mortgage states we cannot keep the loan if we sell the house. The salesman assured us the bank is only interested in receiving the payments and will not foreclose if the payments are made on time. The buyer is becoming increasingly late in his payments, and I am worrying myself sick over this. We could be in a tight spot soon and the late payments are ruining our credit rating.

We did have an attorney at closing. We signed an agreement. But our buyer says if there's trouble, he will leave us high and dry and just leave town. Is there any way we can get ourselves out of this problem?

A. You knew you were risking your loan by selling the house in violation of the mortgage agreement. You should not have taken legal advice from a real estate agent (who should not have given you any.) At the least, you could have protected yourselves by insisting on a good credit report from the prospective buyer, and a substantial down payment.

Go back to your attorney. You should have the right to evict the buyer if payments are late. If the papers didn't provide for that, then your lawyer is at fault and should put it right for you.

Once you get rid of the present occupant, be sure to deal with a different real estate broker. Explore with your lender whether a qualified buyer might be allowed to take over your loan. My guess is that most buyers would rather take advantage of today's low rates anyhow.

Q. Our house is presently up for sale. We bought it at a real bargain four years ago and will have a profit even after the expenses of selling. I would like to know once and for all -- to get our profit tax-free, do we have to live in the house two years or five years?

A. Once and for all, two years' ownership and occupancy in your main home are enough to qualify, assuming they were fairly recent. How recent? Within the past five years. It looks as if you can take your capital gain tax-free, up to a limit of $500,000 for a married couple filing jointly. That should be enough to cover your profit.

Q. We bought our first home many years ago with a VA mortgage. It has been paid off completely. Now we are moving out of state and we would like to conserve our cash and use a VA loan all over again. Is this possible?

A. If your first VA mortgage has been paid off, then yes, the veteran can regain his or her eligibility and get another VA-guaranteed loan.

Even if it wasn't paid off (taken over, perhaps by the qualified buyer of your present home) it's still possible that you might swing another VA loan. Assuming your first purchase was a modest one, you may not have needed the entire amount available for a VA guarantee. In that case, you may have some eligibility left, enough to cover your next -- not too expensive -- home.

• Edith Lank will respond to questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may email her through askedith.com.

2012, Creators Syndicate Inc.

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