Paying off your second mortgage a principal concern
Dear Bruce: I recently came into some money, and I am thinking of paying off my second mortgage. I have two 30-year fixed mortgages at 5.375 percent. The first is conventional in terms of monthly payments. However, with the second mortgage, I have about nine years before I start paying on principal. Would it be wise to pay off the second mortgage now? Thanks in advance. -- M.M., e-mail
Dear M.M.: I am very much opposed to interest-only mortgages. If there is a prohibition about reducing principal on that mortgage, then I would double up or more the principal reduction on your other mortgage. You didn't indicate what the interest rate on your second mortgage is, but I suspect that it is higher than the 5.375 percent that you're paying on the 30-year mortgage. You might wish to start paying that down more quickly. Either way, unless you are an extraordinarily sophisticated investor, interest-only mortgages will eventually come back and bite you hard.
Dear Bruce: My wife had an interesting idea and I would like your opinion. We have a home with a mortgage at 5.75 percent, which is on 5 acres that is partially surrounded by another 20 acres we own free and clear. Would it be prudent to secure a loan on the 20 acres and pay off the mortgage on the house and 5 acres? In these economic times, we could reluctantly allow the land to be foreclosed but would still have our house. -- G.T., e-mail
Dear G.T.: Interesting idea but very likely not workable. Most mortgage companies will not give a mortgage on unimproved (no buildings) property, for the very obvious reason that the unimproved property would be the first thing that a borrower in trouble would allow to go unpaid. Further, even if you did what you've described and can get away with it, if you didn't pay the mortgage on the 20 acres, would not the mortgage company come after you and get a judgment against you and put a lien on your home? I suspect that they would. How would you explain to them why you wanted to borrow the money on the 20 acres to pay off your mortgage? I think they would smell a mouse. In short, it's an interesting idea but I don't believe a workable one. If there is a market, you could sell the 20 acres and use the proceeds to pay off your mortgage. That might be the best way to go if you are really concerned.
Send your questions to: Smart Money, P.O. Box 2095, Elfers, Fla., 34680. E-mail to: bruce@brucewilliams.com. Questions of general interest will be answered in future columns.
Dear Bruce: I am an officer in the military stationed abroad. Is it smart to buy land now so that we can build a retirement home in about 14 years? I plan on being retired from the military at that time, but I will have a post-military career. What factors should I consider before making a decision? -- C.B. e-mail Dear C.B.: I would not purchase land looking that far ahead. First of all, land is an alligator: It eats. You will have to pay taxes, you must have the land insured in case someone gets injured on your property, and furthermore, since you are not around, you have no idea in which direction the community that you purchased this land in is headed, where they will develop the utilities and so forth. It is far better in my view to continue to invest your retirement money in the marketplace. When the time comes, then you can purchase the land. Fourteen years in advance would be a very risky endeavor.
Dear Bruce: Is there any time limit that will allow you to buy a house as a first-time homebuyer and the several years later, after that one is sold, allow you to buy another under the first-time buyer program? -- H.G., e-mail Dear H.G.: Under the federal program where you get benefits for being a first-time homebuyer, if you do not own a home for three years, even though you have owned several in the past, you now become a newly born first-time buyer. The program hasn't been in place long enough to know whether it will continually repeat itself. Unless changes are made, this will be the case.
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