Don’t leave yourself house rich, cash poor

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DEAR BENNY: 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 60s. 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

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.

DEAR BENNY: We are getting ready to close on a home and there is a settlement fee of $685 for lender’s title insurance AND $683 for owner’s title insurance. Must we pay both fees? – Phyllis

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 people have fraudulently create a false deed and found 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 more 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 homeowner (hazard) insurance is the latter covers matters which may occur in the future, while title insurance covers matters which have already happened.

Benny Kass is a practicing attorney in Washington, D.C. and in Maryland. He is not providing specific legal or financial advice to any reader. He wants readers to e-mail him, but cannot guarantee a personal response. He can be reached at: [email protected].