Paying artificially low mortgage payment could backfire

Q. I am 61, and in early 2007 I refinanced my home with a company that offered me a plan on which I could pay as low as $57 a month during the next seven years. Of course the rest of the money I really owe is added to the principal.

I was hesitant but due to the low option and the choice for seven years, I decided to go for it. Of course the mortgage company convinced me the house would double in value while my debt was rising.

Should I try to change my mortgage, or keep paying the lower amount and saving the rest of the money and then try for a reverse mortgage when the seven-year plan expires?

A. How much do you owe on the property right now? Unless the debt is quite a bit lower than what your place is worth today, you're not going to be able to get a new loan, so you'll have no decision to make. Even so, if - as I suspect - you have a high rate of interest, then your debt is going up at a fast rate, and you should explore every possibility with your lender.

If, on the other hand, the mortgage is at a normal rate, not much more than 6 percent, you might as well hold on for the next six years and wait until property values go up.

You talk of "saving the rest of the money" you don't send in, but I don't know where you could stash it and get as good a return as by making full mortgage payments. There's nowhere else you can earn 6 percent (probably more, whatever your rate is) for a guaranteed no-risk return right now. Make a full principal-and-interest payment every month. Your debt won't keep getting larger, and you'll be in a better position to refinance or even try for a reverse mortgage in 2014.

Q. In today's paper you answered a question from a man who inherited his mother's house when she passed away. He had asked if he can write off the time spent fixing it up while she was alive. Your answer included that when the mother passed away, the son inherited the mother's cost basis for the property. So in other words, if she would have purchased the house like my parents did in 1958 for $24,000, and it is now worth $320,000, he would inherit the cost basis of $24K plus any improvements done over the years.

I always thought an heir got the cost value of the house in today's market (which would be the $320,000, no taxable profit when he sold). Are we talking about the same thing here, or could you clarify?

A. Take another look. That's not quite what the man wrote, and it's not quite what I answered.

Yes, his mother just died, but he wrote: "The house was deeded to me four years ago." He did not inherit it. If he had, then yes, you're right. An heir would receive current "stepped-up" value as his cost basis, avoiding capital gains tax when he sold. But as I pointed out, this man received the house as a gift while his mother was alive, so he also took over her cost basis for the property.

Q. How will always paying a mortgage during the grace period affect my credit? I want to pay before the first every month; however, the person who is making the payments with me insists on paying during the grace period. The property was purchased under my credit and I want to protect it.

A. As long as the payment is received during the grace period, it is not reported as late. Simply getting it postmarked during the grace period doesn't count, though. Tell your buddy it must be mailed early enough to get there in time.

Q. Why do landlords rent-to-own? Is there any advantage, assuming they want to sell anyway?

A. No one financial technique is right for everyone, and not every owner who wants to sell would want a rent-to-own deal. I can think of several reasons, though, why it might fit a particular landlord's situation.

Perhaps the property couldn't meet the standards of a regular lending institution. Or the landlord could have some financial or tax planning advantage by collecting purchase money over a period of years. Sometimes it's just a way to find good tenants, because those who plan to buy are likely to take care of the property and treat it as their own. Or perhaps the place is simply difficult to sell right now.

• Edith Lank will personally respond to any questions sent to her at 240 Hemingway Drive, Rochester, N.Y. 14620 (include a stamped return envelope), or readers may e-mail her at ehlank@aol.com.

2009, Creators Syndicate Inc.