Does It Pay To Pay Off Mortgage Early

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My property is zoned to expand, and I want to build a second unit. What’s feasible, and where do I start?

A few extra bucks here and there may cut down your loan term, but will it also wilt you wallet? BY CHARLES SCUTT CTW Features

Q: I live on a property that’s zoned so that I can expand my house or add a second unit as a rental. I’m interested in adding a second unit but want to know if it is financially feasible and wise. I’m thinking of adding a modular home instead of a stick-built house to keep costs down. Can you suggest where to begin?

A: When zoning says you can add a second unit, do they mean a second unit within an existing home, or will they allow a separate home, which sometimes is called an “accessory” unit? Some areas now say accessory units can be OK with proper zoning, while others oppose accessory units because they worry about population density. Have an attorney check your zoning before going further. Most residential construction today is not entirely stickbuilt or modular; instead, at least some modular, factorybuilt elements are used for speed, cost-control and uniformity. You need a realistic cost estimate for improvements, and then you need a reasonable estimate of the income you might receive. Builders can tell you about the cost of improvements, lenders can help with construction financing and real estate brokers will know about local rental rates. You also have the issue that eventually you may wish to sell.Will you be able to get back your investment if you have a second unit? This may be attractive to some buyers but too costly for others. As an alternative to what you propose, would it make more sense to use the same cash and buy a rental property elsewhere? You would likely have a lot more privacy. Q: I sold a house on a land contract. How do I force the buyer not to have pets and to keep the yard clean?

A: You have not “sold” your house.A “land contract” is an installment sale.Title does not transfer until some or all payments have been made, and it’s entirely possible that title will never change hands. If the title has changed, then the property has been sold and pets and yards are no longer your concern. What you do have, at least at the moment, is a rental property.With a rental there should be a lease, and the See ASK OUR BROKER, Page 2

Does it pay to pay off that mortgage early?

Home improvement: A little fix-up on the inside, a little on the outside, and your home may just find it’s lucky buyer.

Slow Summer Market? Speed Up the Sale Don’t let dog days drag you down. Boost your home’s appeal with these tips BY BARBARA BALLINGER CTW Features

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ince the start of the year, many sellers have been jittery – and for good reason. Back in January, new-home sales made a significant onemonth plunge of 16.6 percent, according to the U.S. Commerce Department.Add to that increased inventories and summer vacations, and it’s no wonder that some sellers’ nervousness is climbing as high as the temperature outdoors as they wait and wait for a contract to materialize. If you face this situation, don’t rush to blame the economy or a real estate practitioner.Try to be objective about your house. Perhaps, it’s priced too high because you pushed to get the same dollars your neighbors did a year or two ago. Or, perhaps, your brown lawn outside is an immediate turnoff.

Still another reason could be that you’re simply not cooperating and making the house easily available for showings. Before getting more upset, try the following steps:

MAKE YOUR HOME BORING … The most effective way to increase your home’s market value without spending a lot of money on renovation and improvements is to be sure it’s clean and uncluttered with a fresh, neutral palette, which is more appealing to most buyers and therefore more valuable, say Todd Rissel, CEO of e2Value Inc., Stamford, Conn. Uncluttered also pertains to the exterior, so keep the grass green, trim the bushes and keep those flowers perky and colorful.

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AT FIRST THOUGHT, it may not make much sense to rob Peter to pay Paul, as they say. But when Paul is charging more than 6 percent interest over 30 years, pilfering from old Pete to emancipate from profithappy Paul can suddenly make a lot of cents – especially as this metaphor relates to home mortgages. For many borrowers, it can be financially prudent to consider paying off the mortgage loan early to potentially save tens of thousands of dollars that would otherwise go toward interest, say the experts. “It’s definitely a good idea to save for the future,” says Clemens Sialm, assistant professor of finance in the Stephen M. Ross School of Business at the University of Michigan. “Individuals can not just save by buying stocks and bonds or contributing to a retirement account – they can also save by making additional principal payments on their mortgage.” Paying off a mortgage loan early via accelerated payments will reduce the balance faster, “which in turn will dramatically lower the total interest paid over the life of the mortgage,” says Andrew Housser, founder/co-CEO, Bills.com, San Mateo, Calif. Say, for example, you have a $200,000 mortgage with a 30year term at a fixed interest rate of 6.5 percent, says Housser.“You will pay total interest of $255,000 and total payments of $455,000 over the 30 years. But if you are able to squeeze in one additional mortgage payment per year, you will lower your total interest to about $195,000, or a total cost of $395,000, and you will be paid off in about 24

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SUMMER SLUMP ‘Tis the season to sell CONTINUED FROM PAGE 1

… BUT MAKE IT MORE PLEASANT It’s a cliché for a reason. Pleasant smells trigger positive emotions, which is why they’re used in all types of retail experiences, especially real estate, says Rissel. Even if you’re not a baker extraordinaire, you can bake a few apples or a package mix of brownies and let the smells waft through your kitchen and the rest of your home.

GIVE AWAY FREEBIES People like getting something for nothing or something for the time they expend to visit your home. Let prospective buyers take photos of your rooms and of themselves in your home. Leave out disposable cameras for them to snap pictures or encourage them to bring along their own, which will help tie them emotionally to the house and a possible purchase, says Rissel. If your salesperson hosts an open house, offer snacks and something to drink.

GREET THE NEIGHBORS Tonja Demoff, author of “Bubble Proof: Real Estate Strategies that Work in Any Market” (Kaplan, 2007), suggests creating a post card of your home titled,“Pick Your

PAY OFF Cut the mortgage short CONTINUED FROM PAGE 1 years – six years early, with a net savings of approximately $60,000.” Those who choose an accelerated-payment schedule will find that making payments, starting earlier in the life of the mortgage, will make a bigger difference in the amount of interest paid over the years, Housser says. Sialm adds that prepaying a mortgage particularly is beneficial for households that do not itemize, have high mortgageinterest rates, pay private mortgage insurance and already max out other tax-qualified investment opportunities (employerassisted and individual retirement accounts. For households that itemize their deductions, however, the return on investment is reduced because of the tax deductibility of mortgage interest, says Sialm. “A household in a 25-percent marginal income-tax bracket that itemizes deductions will effec-

Neighbors,” and sending the cards to everyone in the neighborhood so they can browse your open house.Your goal is to get them to talk up your listing and encourage friends and family who’d want to live in the area to come by.

water. Install more insulation or weather stripping, which can give you tax credits. If you’ve already done this, show your utility bills when you market the home,” she says.“But be careful about bigger costs, such as a new furnace, which you may not get back.”

JOIN IN A PROGRESSIVE OPEN HOUSE Saleswoman Sharon Ketko, of Keller Williams North Texas in Plano, has found a progressive dinner-style open house on a Sunday afternoon with five or six listed homes participating is a great way to bring in traffic. She keeps the houses open from 1 p.m. to 5 p.m., promotes them with local advertising, direct mail and color booklets. Her team on duty at each home is trained to discuss the details of all participating homes.

GET READY TO MOVE OUT Even before your house goes on the market, get ready to move out by moving furniture that takes up too much space to a storage facility, says Gary Gentry of Gentry Group Realtors,Austin, Texas. Donate or give away any items you don’t plan to move to your next home. Gentry also has an inspector evaluate the house, so he can inform the sellers if they need to spend money on systems or visual items that could make or break the sale.

TOUT A HOME’S GREEN FEATURES

hose it off.When all is clean, set a charming outdoor scene, which helps to elicit positive emotional responses, says Martha Webb, founder of the consulting firm BCW Group, Minneapolis, whose background is in motivational films. Her suggestions, some of which can be found in “Dress Your House for Success” (Random House, 1997): Set out a patio setting and outdoor games, as if ready for a barbecue.

REVISIT INDOOR IMPROVEMENTS Webb takes similar steps indoors. She has added a board game and bowl of popcorn in a den to make the room look more livable. She also has added popcorn in a media room and played a movie when buyers came through.You want the house to say,“Welcome home!” she says.

COUNTER BEFORE THERE’S AN OFFER

Al Gore’s documentary “An Inconvenient Truth” has definitely put the spotlight on the advantages of going green to be a better steward of our planet’s resources and cutting energy use. Making a few inexpensive purchases can make a home more energy efficient and woo buyers who dread seeing high cooling bills in summer and high heating costs in winter, says Rozanne Weissman, director of communications and marketing at the Alliance to Save Energy, Washington, D.C.“Upgrade appliances to Energy-Star label appliances … that use less energy and

REVISIT EXTERIOR IMPROVEMENTS

tively only pay a 4.5 percent mortgage interest rate after taxes.” The issue of making accelerated payments is really an individual choice, says Matt FitzGerald, vice president of Fidelity and Trust Mortgage, Bethesda, Md. “Many people can’t stand debt and prefer to have their home paid off so they can have little or no debt at retirement,” he says. “For those who work for the government or some time of company with a guaranteed retirement, it would definitely make sense to pay extra each month. But for most people who will be living off savings, Social Security or 401(k)s, it may make more sense to stick extra money into some type of retirement vehicle or investment that can grow for retirement.” Suppose, for example, a safebond mutual fund has an expected long-term return of 5 percent after fees and expenses, says Sialm. If an itemizing household – with a 6-percent fixed interest rate on their 30-year mortgage – would hold the bonds in a taxable account, then the household would be better off paying down

the mortgage early instead of buying the bond mutual fund. However,“if an itemizing investor can hold the bonds in a tax-qualified retirement account, then it is better to contribute to that account and not accelerate the principal payments on the mortgage,” says Sialm.“This is because the after-tax mortgage rate is only 4.5 percent, whereas the bonds held in a retirement account are effectively taxexempt and earn the whole 5percent return.” Additionally, mortgage prepayments may not be wise for those locked into a low-interest or adjustable-rate loan, those who manage money poorly, and those who face tax liens, lawsuits or other liabilities for which their home is at risk. And if you live in a high-risk zone for earthquakes, floods, fires and other natural disasters, the prepayment strategy also may be counterproductive, says Eva Rosenberg, Northridge, Calif., publisher of TaxMama.com and author of “Small Business Taxes Made Easy” (McGraw-Hill, 2004). “You want your equity lower, rather than higher, in case the

You needn’t spend a fortune on hiring a painting crew or a landscape designer if your house still isn’t selling, but eliminating unwanted problems and stains will help. If mildew or mold are a problem, use trisodium phosphate – found in most homeimprovement centers as TSP – to remove the musty growth, says Pat Simpson, host of HGTV program “Before and After.”To eliminate any stubborn driveway stains, he suggests one part powdered laundry detergent, one part baking soda and one part bleach. Spread it, scrub, then

If a buyer has expressed interest but still is on the fence, have your salesperson inquire about the reason for the hesitation. If it’s slightly worn carpet or a toohigh price, Jana Caudill, with Keller Williams in Crown Point, Ind., negotiates with the buyer’s agent to determine what changes can be made to get an offer into play.

DON’T BE GREEDY Greediness takes a longer time to sell, says Demoff. Remember, a bird in the hand is worth two in the bush.

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home is destroyed,” Rosenberg says.“Disaster insurance these days has such high deductibles and offers such poor coverage that you can literally go broke to meet the deductible if you have damage.You may want to leave yourself in a position to walk away in the event of excessive damage.” Ron Cahalan, a Gilbert,Ariz.based lending analyst, cautions borrowers that they should first pay off all other consumer debt ahead of their mortgage. Rates on other obligations typically are higher and are not tax deductible, he says. Before sending in any accelerated payments, Housser says you should check your loan fine print carefully to ensure that the lender does not charge steep prepayment penalties. Instead of accelerating payments, you also may want to consider refinancing to a shorterterm loan, adds Sialm. If you have a 6-percent fixed mortgage for $100,000 with a maturity of 30 years, you would need to pay approximately $244 extra toward the principal every month to pay down the loan in 15 years. But in

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Ask Our Broker CONTINUED FROM PAGE 1

lease should show how pets and yards are to be handled. Land contracts raise a number of issues for both owners and buyers. For instance:Who is paying homeowner’s insurance? Does the tenant have renter’s insurance? What purchase rights does the buyer have if the property is foreclosed? Before going further, have your agreement reviewed by a local real estate attorney.

Q: How does a real estate agent collect a commission for a seller-financed transaction or lease-option sale? A: Whether a property is sold for cash, financed by a lender or financed by an owner, there’s a listing agreement, a sale contract and a closing.The listing agreement establishes the brokerage fee, while the sale agreement directs the closing agent to pay the brokerage fee at settlement. Unlike a sale, with a lease option there may not be a closing for several years, and in many cases there may not be a sale at all.With a lease option you might expect a listing to require at least some of the brokerage commission to be paid when the contract is created in recognition of the fact that the broker delivered a viable tenant and a potential buyer. Q: I listed a property and have had no contact or action from the listing agent other than articles by mail telling the “doomsday” story of the current market. I feel as though the agent is pressuring me to reduce the price even though comparable homes in the area mostly are higher. The agent has not placed any ads and only recently added a picture to the MLS listing. What can I do?

A: The agent should perform as promised and remain reasonably in contact. If you are dissatisfied, speak with the agent’s broker or office manager. If that does not work, you may want to contact the real estate regulator for your jurisdiction. It may be that your agent is right and that the market has shifted.This has happened in a number of areas. Look for such signs as a larger inventory of homes for sale and longer average selling times. Why not have your agent develop a new competitivemarket analysis to be sure? Also, review the marketing plan to see exactly what has been done to date and whether changes in the plan are appropriate. © CTW Features Need real estate advice? Peter G. Miller, author of “The Common-Sense Mortgage,” would love to hear from you. Send your questions to [email protected]

this scenario, you may be better off getting a 15- or 20-year mortgage, which charges lower interest rates. Cahalan says that the question of whether or not to pay off a mortgage early should be an investment decision based on the rate of return if you are looking at it purely financially. The only thing that cannot be

measured when prepaying a mortgage is “the emotional and very real advantage felt by owning one’s home.There is, however, a real satisfaction felt by having one’s home free and clear of debt,” he says.

© CTW Features