DEAR BRUCE: My husband is 54 and is recently retired. He makes between $66,000 and $73,000 annually from his pension. I estimate, because my husband’s ex is taking him to court for her share of his pension, and the courts have not yet ruled on what her share is. Once he’s done with court, our income combined may range from $138,000 to $144,000 per year.
In our savings, we have about $20,000. We have four children, ages 9 to 14, and my husband and I do not file taxes together. Our total monthly debt is about $9,000. We have no credit-card debt. We do have a home equity line of credit with an outstanding balance of $6,000. Our primary residence has a mortgage, and we have three rental properties with mortgages (all rented, only one with a profit). We have 3 1/2 acres of land, title free, and our normal utilities, phone, satellite TV and normal expenses for our children.
I figure if we double up on the mortgages, in six years we could have our house paid off. The current mortgage balance is $147,000; our monthly payment is $800. Given our situation, when is it too soon to pay off our mortgage? — Lyn, via email
DEAR LYN: I am perplexed about a number of things, but let’s start at the end of your letter.
You have a current mortgage of $147,000. Even if you wanted to pay it off, how would you do so? I don’t see where the money is coming from. Further, you mentioned that you have three rental properties with mortgages, and two of the three are not making a profit.
I question your math as well. If you’re paying $800 a month, that’s $9,600 a year. If you doubled up, that would be a total of $19,200 a year, which multiplied by six years is $115,200. Part of that sum would go to pay taxes and very likely insurance out of your escrow account. Even if the entire $115,200 were paid against principal, you wouldn’t come close to paying off your mortgage. You would have to pay closer to $24,500 a year.
I’m also wondering why you file taxes separately. People with a decent but modest income very seldom save by filing separately.
I think some recalculating on your part needs to take place. With your income, I don’t see this happening in six years. Good luck.
DEAR BRUCE: This is strictly a hypothetical question. We have A-1 perfect credit and would never do anything to jeopardize that, but my husband and I have a friendly bet on the answer.
In 2005, we bought a house for $136,000 cash. The home’s value increased to about $220,000 in early 2007. We took out a home-equity loan on that house for $220,000 because we were buying a second home and didn’t need the loan. This leaves us with an open line of credit for $220,000 just sitting at the bank. We never sold the first house but are renting it. It is now worth about $120,000.
My question to you is: What would the bank do if we spent that money and didn’t pay it back? I am assuming that it would sell the first house that we used as collateral, but the bank would suffer a loss of about $100,000.
We live in Florida, and I don’t think they can place a lien or take the second house (the one we live in). My husband thinks the bank would just take the loss. I think the bank would make us pay the difference. Who is right? — J.Q., via email
DEAR J.Q.: It’s my opinion that there’s no way the bank would take a hit like that.
You have an open line of credit for $220,000. But it’s very unlikely the bank would lend you the money based upon such an old appraisal. Even if that amount were still available to you, it would be clear that you knew the collateral on this piece of property was nowhere near what you were borrowing. I don’t think it would be much of a stretch to prove that you went into such a situation fraudulently.
Like a lot of wonderful ideas that sound even better after a couple of cocktails, this is one that’s best forgotten.
Send your questions to: Smart Money, P.O. Box 2095, Elfers, FL 34680. E-mail to: firstname.lastname@example.org. Questions of general interest will be answered in future columns.