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Pay down mortgage or make upgrades

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POSTED January 24, 2014 8:08 p.m.

Q:    We purchased a home in northern Indiana and are trying to sell our other home in Indianapolis.

Would the smart thing be to apply the proceeds to the balance on this home, and then refinance the smaller balance for less than 30 years? My husband wants to spend all the equity on other things like a new car and new metal roof.

The equity will be about $110,000.  Our present mortgage is $138,000.    We are both retired and in our late 60’s. His view is that a home is a liability and he doesn’t care if it is ever paid off and prefers to die owing money on it. Of course, I grew up wanting my home paid off (or nearly so) at retirement.

We have no other money issues at the present time. Phyllis.

A:   Dear Phyllis. This is really not a legal matter but a personal and financial issue that you and your husband have to work out. I don’t practice divorce law. Many people grew up with the idea of having a house free and clear, especially when they retire. But I have encountered too many senior citizens who are house rich but cash poor. They cannot afford to pay the real estate taxes or even to maintain the property.

This is especially troublesome with the so-called “baby boomers” who are now nearing or entering into retirement. They spent their money often recklessly, and now have little or no retirement funds

It is true that you may be eligible for a reverse mortgage, but in my opinion, that should be your last option. Perhaps you and your husband should compromise, and split the difference. And by the way, if the house needs a new roof, I would definitely make that investment.

One suggestion: keep the loan you currently have, but start making larger monthly payments. This way, you will be able to buy that new car with the sales proceeds from the other property, but at the same time will start reducing the outstanding balance on your loan. Make sure that there is no prepayment penalty and that you mark on your check and on the mortgage statement that you are making an additional payment.

Q:  We are getting ready to close on a home and there is a settlement fee of $685.00 for lender’s title insurance AND $683.00 for owner’s title insurance. Must we pay both fees? Phyllis.

A:  Dear Phyllis. Sorry I was unable to respond earlier to this question, since I see (from the question above) that you already bought the house. But you have raised an important question, which many potential homebuyers often ask.

If you are obtaining a mortgage loan, your lender will insist that you obtain lender’s title insurance. The lender wants assurance that if there are any title issues – we lawyers call them “clouds” – that the insurance company will either resolve them or pay the lender for any loss it may have. Typically, the homebuyer will pay the cost of that insurance; however, in some states, the custom is that the seller will pay, and in fact some lenders – as an incentive to get the loan business – will pick up that cost.

Owner’s title insurance is designed to protect you in the event of a defect in title. According to the Better Business Bureau’s “Educational Consumer Tips”, “when you purchase property, you are really buying the seller’s rights and interests in the real estate. These rights and interests , often, are not as clear as they may seem, because there are a variety of factors that can affect the seller’s title.”

What kinds of title problem exist? In recent years, with all of the foreclosures, many fraudulent persons create a false deed and find a buyer. Title insurance will protect and insure against forged documents. Unreleased mortgages is another potential problem; you pay off your mortgage and a release should be filed in the local land records. Often, either the lender – or the homeowner – fails to record, and now that old lender is no longer in business. Title insurance will cover any such loss.

It should be pointed out that while the lender will be taken care of under its insurance policy, any equity that exists over and above the mortgage loan is unprotected without an owner’s policy.

Homebuyers have the right not to purchase owner’s title insurance policy. But you have to understand the potential consequences. Just because your seller has owned the property for over 50 years, does not necessarily mean there are no clouds. Nowadays, most land records are memorialized in a computer. But clerks usually  manually enter the data and mistakes do happen. Equally important, long before computers and even typewriters, everything was hand written; and mistakes did happen.

The major difference between title insurance and home owner (hazard) insurance is the latter covers matters which may occur in the future, while title insurance covers matters which have already happened.

Q:   Our condominium declaration allows renting but there is no rental cap or time period for the lease. We have a waiting list of people who want to rent their units. Currently, we have four owners leasing their units. Two have been leasing for around ten years. The other two have been leasing since 2011. These last two bought their units in 2006. We are in the process of putting a leasing amendment in place that would cap rentals at 15% [4 units] with a lease term of two years. We want to grandfather in current lessors, giving them some amount of time before they  lose their right to lease. What might be a fair way to transition to the new amendment?  Al.

A:  Al, this is one of the hottest topics today in community associations. Because FHA – which is the predominant lender of condo units – has imposed strict guidelines for mortgage lending, including caps on the number of rental units, more and more associations are looking for ways to comply. Many associations have adopted (or are considering) amendments to their legal documents. The courts throughout the country are unanimous in upholding leasing restrictions, based on the legal theory that unit owners are bound by the legal documents that were in existence at the time they bought into the association as well as those documents that are legally amended from time to time.

Most courts strongly suggest that where leasing is permitted in the legal documents, those legal documents must be amended. And some courts even require that the Declaration – the higher level of power – and not just the Bylaws be amended. In a 1995 Illinois court case, however, a court did indicate it would  allow restrictions that were promulgated by the board of directors. However, in such a case, the court would look carefully as to the reasonableness and the necessity of such a rule. I cannot recommend a Board rule; it should be an amendment preferably to your Declaration.

You asked about grandfathering; that means that existing owners who currently rent their condo units will be permitted to do so. Generally, condos recognize that since an amendment requires a super-majority vote of all owners, in order to get sufficient votes to enact a leasing restriction amendment, they will need the vote of the investor owners.  So, to get their vote, the investors are allowed to continue to rent.

But for how long? Clearly, if the association does not need the investors vote, the amendment would make it clear that there can be no further renting, and when the existing leases are up, the investor will no longer be able to rent.

I am struggling with an answer. Based on the facts you have provided, it seems that the four units may be rented perpetually, to the detriment of all other owners. Accordingly, I would discuss the situation with the investors. Explain that you have to impose leasing restrictions and it is in the best interest of everyone (including the investors who someday will want to sell and expect that their buyer will be able to get financing)to enact such an amendment. See if you can work out a compromise.

But if that doesn’t work, you may want to increase the cap from a mere 15%. Currently, FHA sets the cap at 50 percent, so why not increase yours  to at least 30 percent?

In the final analysis, it’s all a matter of politics. If you have the votes, you can put an immediate end to such rentals (i.e. existing leases cannot be renewed). But it’s also a matter of good neighbor; you are a small association and clearly want to avoid confrontation and law suits.

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