Mortgage interest isn’t pre-paid

Q. I hope you can answer a question relating to interest money we paid each month as part of our house payments. This has puzzled both my husband and myself. We had a 30-year loan from HSBC for the mortgage of our house and we paid off the mortgage in full in 2012, 16 years early. I checked our mortgage documents and it stated there would be NO penalty for early repayment of this loan. As HSBC is no longer a bank here we can’t ask them our question.

As this is the second house we paid off in advance, we thought we would receive not only the escrow money back but we would receive the remaining interest money back (as we did with the first house). This would have been the interest we would have paid for the 16 years remaining of the loan because we had been paying interest each month as part of our payments. But we received only the escrow money on this second house. We are wondering why.

A. Interest is like rent for the use of someone else’s money, and, like rent it’s usually due monthly. The only difference is that rent is generally paid for the month in advance, and interest is paid “in arrears” -- for the month just past. The payment you made on — say — February 1 covered interest due for the use of the mortgage money during the month of January. Your March 1 your payment included interest due on the money you borrowed during February.

Trust me — you never paid any interest ahead for the 16 years remaining on your loan, so there was nothing to be refunded to you. I am certain that you never received a return of prepaid interest when you sold that first house either. (In rare circumstances, you might have received per diem credit for part of a month at most.) You must be remembering something else. See if you can find your old statement.

Q. I inherited the family home and took back a 30-year mortgage, which expires July 2014. Do I need a lawyer to discharge the mortgage? What steps do I need to take?

A. It’s not quite clear what’s going on, but evidently you sold the house and took back a mortgage that has only another year to run. You will then sign a Certificate of Satisfaction (in some states, a Deed of Reconveyance) stating that the debt has been paid off, and see that this important document is filed in the Public Records Office of the county where the property is located. The certificate will then be forwarded to the borrower. Any lawyer can take care of this simple paperwork.

Q. I have been told there is a time period of at least five years or more that a person has to sell their property and not be subject to nursing home costs if the person can’t afford them. What happens if a person sells their property and does away with all the money less than five years before applying to go into a nursing home on Medicaid? Do you see any concrete reason a five-year minimum selling property is imposed in the first place?

A. That five-year look-back isn’t about property you might sell. It applies to assets you’ve given away. If it weren’t there, a millionaire could give everything he owned to his kids, and then the very next day expect Medicaid (that is, the rest of us) to pay his nursing-home costs because he was penniless.

Q. My son owns a house and he is about to start a job 200 miles away. He is legally separated from his wife, but they are not divorced. Can he let his wife and daughter live in that house rent free instead of paying child support (mutual agreement because it saves both money) and still claim the mortgage interest on his income tax return? If so, what are the consequences when he sells the house in about six years?

A. It sounds as if your son is still liable for that mortgage, and if he makes the payments, he can take the interest as an income tax deduction. And there’s a special provision as far as that homesellers’ tax break is concerned. If, at the time the house is sold, his separated or divorced wife meets the qualifications for tax-free profit on the sale, he can also, even though the house hasn’t been his residence in recent years.

Ÿ 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.

© 2013, Creators Syndicate Inc.