How to spot an unnecessary mortgage fee

Sunday, September 2, 2007

Dear Bob: I've read your articles for years and find them incredibly helpful. But I'm wondering about mortgage refinance junk fees. I know we consumers have the right to avoid these fees, but my experience has been these lender fees usually come at the end of the refinance process after the mortgage is finally approved. How should borrowers distinguish between "real" fees and unnecessary junk fees? Will we ever find a mortgage without junk fees?

Nan S.

Dear Nan: Each mortgage lender is required to disclose all fees on the lender's Good Faith Estimate (GFE), which must be supplied to you within three days after you submit a written loan application. This form, however, is not binding on the lender and there is no penalty or legal enforcement for a lender's false GFE, but it's a starting place.

When you spot a junk fee on the GFE, object to it up front. Unless the lender will waive or at least modify the junk fee, maybe you should do business elsewhere. However, if the lender failed to disclose a fee on the GFE that later shows up on the closing documents, as the borrower you are in a strong position to challenge that unexpected fee and negotiate it away.

The best way to determine if a fee is necessary, or if it is an unnecessary pure-profit junk fee for the lender, is to ask yourself, "What benefit am I receiving for this fee?"

For example, an appraisal fee is a legitimate charge because the lender requires an independent appraisal and you will benefit by knowing the appraiser's opinion of the property's fair market value. Other examples of legitimate fees include tax service fee, courier fee, flood certificate fee, recording fee, title insurance fee and notary fee.

But unnecessary junk fees, which provide the borrower with no specific benefit, include processing fee, application fee, administration fee, documentation fee, warehousing fee, underwriting fee, and, when the lender runs out of names, a miscellaneous fee.

Dear Bob: My boyfriend and I have owned a home together for about 10 years. We each pay half of everything. But only my name is on the title and the mortgage because his situation was not the best 10 years ago. Since we have no plans to marry, how do we get the $500,000 tax exemption, instead of just $250,000, when we decide to sell?

Christi P.

Dear Christi: Thanks to Internal Revenue Code 121, if you own and occupy the house as your principal residence at least 24 of the last 60 months before its sale, you can qualify for up to $250,000 tax-free profits when selling it.

However, your boyfriend is not eligible for an additional $250,000 exemption. The reasons are, even though he pays half the mortgage, he (a) is not on the title and (b) is not married to you.

Also, he is not entitled to claim any itemized income-tax deduction for mortgage interest and property taxes for the same reasons.

If you add him to the title, and he owns and occupies the house as his principal residence for at least 24 of the last 60 months before its sale, then he becomes eligible for his own $250,000 exemption.

Or if he marries you and occupies the house as his principal residence at least 24 of the last 60 months before sale, even though he is not on the title, then he is entitled to a $250,000 capital gains tax exemption. For full details, consult your tax adviser.

Dear Bob: Following a legal settlement for water damage against the developer of my rental property, I was still out-of-pocket several thousand dollars more than the payment I received from his insurance. Can this noninsured amount I had to pay to complete the water damage repairs qualify for the casualty loss deduction?

Mike H.

Dear Mike: Because this is a rental property, you can deduct your out-of-pocket expense as a repair cost on Schedule E of your income-tax returns.

However, if this was your personal residence, to be tax-deductible an out-of-pocket casualty loss must (a) be "sudden, unexpected or unusual" and (b) exceed 10 percent of your annual gross income (AGI). For full details, please consult your tax adviser.

Dear Bob: What is your opinion of weekend open houses to sell homes? I am in the process of renovating a house so I can sell it for a profit. My Realtor is telling me he doesn't do open houses. He says he has been selling real estate for 20 years and open houses don't work. This agent also says other marketing tools such as ads are worthless. He says listing on the local MLS (multiple listing services) and several Web sites with the right price is the best marketing. What do you think?

Brent H.

Dear Brent: I think you are talking to a very lazy real estate agent. I'm surprised he has survived 20 years selling houses with such a bad attitude. What is his success record selling houses like yours? I suggest you interview two or three other agents who sell homes in your vicinity to compare their listing presentations.

The agent you described doesn't realize open houses are a great place for him to meet prospective buyers and sellers. Maybe he won't sell your house at a specific open house, but if he doesn't hold open houses he surely won't sell your listing or any other houses as a result of meeting new prospective buyers.

If that agent thinks he can sell your house by merely putting you're listing into the local MLS and on a few Web sites, he is downright lazy and isn't working in your best interests.

Whether you select that agent or a better one, please don't sign a listing for longer than 90 days unless it contains an unconditional cancellation clause after 90 days.

Dear Bob: I own a tenant-occupied rental house that I am considering selling to my tenants on a lease-option or a lease-purchase. What is the difference?

Gene G.

Dear Gene: A lease-option gives the tenant the option or choice (but not the requirement) to buy the property at the agreed price and terms. The term of a lease-option is customarily one or two years.

But a lease-purchase agreement obligates the tenant to buy at the agreed price and terms, within the specified time limit, such as 12 months.

Either way, you should insist on substantial upfront, nonrefundable option money. Be sure the lease-option or lease-purchase contract very clearly states the option money, typically 1 to 3 percent of the option price, is not refundable. For full details, please consult a local real estate attorney.

Dear Bob: I own a rental house. My neighbor's pecan tree litters my driveway and roof with leaves, pecans and sap. The tree roots have cracked the fence and raised part of my concrete driveway. What recourse do I have? Can I cut the roots and limbs? What if the tree dies?

Etta J.

Dear Etta: At your expense, the laws of most states allow you to trim the neighbor's encroaching tree roots and limbs back to the property line.

However, if you kill the tree, you could be liable to the neighbor for the lost value of the tree, possibly several thousand dollars. For full details, please consult a local real estate attorney.

The new Robert Bruss special report, "Pros and Cons of Living Trusts to Avoid Conservator ship, Probate Costs and Delays for Your Heirs," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at (800) 736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

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