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Extra monthly mortgage payments amount to savings

DEAR BENNY: Your recent column raised the question of making one extra payment a year as compared to spreading it out over 12 months.

The critical factor is whether the extra payment is made at the beginning of the year. At the beginning, it advances the amortization schedule very differently than at the end of the year. -- Stanley

DEAR STANLEY: Thanks for writing. You are correct. However, many homeowners cannot afford to make a large, lump sum payment either at the beginning or at the end of the calendar year.

That’s why I suggest making extra payments each and every month, in an amount that is at least one-twelfth of your actual monthly payment. This way, you reduce the principal balance each month, and thus the interest calculation for the next month will be lower.

But, if you do decide to make additional principal payments, make sure that your check — and any coupon that you send to the lender — specifically references this extra payment and provide the exact amount.

DEAR BENNY: In a previous column, you talked about canceled debt in regards to a short sale.

My question is: Does the bank have to agree on the short sale and cancel both the principal and second mortgage?

Example: If the fair-market value of my home now is $176,000 and my initial home mortgage was $219,000 plus an additional second mortgage of $30,000 (used for improvements on the home), then $73,000 is canceled debt only if the bank agrees? And if the bank agrees then I don’t have to pay any income tax on the debt, correct? If the bank does not agree on a short sale, then am I out of luck? — Jerry

DEAR JERRY: Banks are banks; they don’t have to do anything they don’t want to do.

No, the bank does not have to agree on the short sale, regardless of how attractive it may be to the bank.

I often question why a bank would foreclose on a property and keep it in its inventory — called “real estate owned,” or REO — rather than allow it to be sold for a price lower than the mortgage amount. When the bank owns the property, it has to pay the real estate tax, insurance and maintenance. If and when the bank decides to sell, it will retain the services of a real estate agent, and that will cost them a commission.

But, as I said, “Banks are banks.”

It appears from your question that the same bank holds both the first and the second trust (mortgage). That makes it a lot easier to cancel both loans.

It is much more difficult to get a short sale approved when the first and the second are held by different lenders. The first takes the position that if the second does not agree to reduce — or cancel — its loan, the first will foreclose, which will wipe out the second trust holder. On the other hand, the second says, “Why should you (first holder) get all the money without me getting some of it?”

As to whether you have to pay any income tax on the canceled debt, that really depends on the circumstances. If this is your principal residence, then no income tax will be owed.

For more information, go to www.irs.gov, click on publications and download Publication 4681, “Canceled Debts, Foreclosures, Repossessions and Abandonments.”

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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