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Archive for Friday, December 23, 2005

Rising mortgage rates putting adjustable-rate borrowers in bind

December 23, 2005

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Q: We took out an adjustable-rate home-equity loan in June 2004. It seemed like a good deal at the time because our good credit score allowed us to get the prime rate, which was then 4 percent. Now, the prime rate has risen to 7 percent, and our payments have soared. What can we do?

A: Lots of borrowers (including your humble correspondent) have been whiplashed by the 18-month-long run-up in the prime rate, which the Federal Reserve has steadily raised in quarter-point intervals to fight long-term inflation and prevent the economy from overheating.

Millions of home-equity credit lines, as well as many adjustable-rate first mortgages, are based on movements in the prime rate. The difference between the 4 percent rate that prime rate borrowers enjoyed in the first half of 2004 and the 7 percent rate that they were paying in mid-December of 2005 is enough to add nearly $200 to the cost of paying back a $100,000, 30-year loan.

These borrowers could face even more financial pain in 2006, because regulators at the Fed have indicated that they'll raise the Prime and other key rates used to calculate changes in ARM loans at least a few more times. Rates on fixed-rate loans also are expected to climb by at least one full percentage point.

With rates on virtually all types of mortgages expected to go up in the months ahead, today looks like a great time for many prime rate borrowers like you to refinance into a fixed-rate mortgage - assuming, of course, that you plan on living in the home long enough for the monthly savings you'd gain by lowering your payments to offset any costs that might be involved in getting the new fixed-rate mortgage.

Some lenders are offering to let their prime rate borrowers convert to a fixed-rate at little or no cost. If you qualify for such a program, your savings will be even greater.

Q: You have written about how long a bankruptcy or other negative information can stay on a consumer's credit report. But how long does positive information stay on a report?

A: Positive information, such as active credit-card accounts that have been promptly paid every month, remain on a report forever. Information about accounts that were closed with a perfect payment history generally remains on a report for 10 years.

Q: We got into a tax dispute with the Internal Revenue Service several years ago and could not reach a settlement. The IRS eventually put a lien on our home, but we didn't worry about it because we figured we could just pay the lien off with our profits when we eventually sold. Now we are trying to sell and have accepted a good offer, but the tax lien is preventing the buyers from getting title insurance, and the whole transaction might fall apart. What can we do?

A: Banks won't lend money to buyers until a title-insurance policy is in place, but title insurers won't agree to issue policies until they're sure that the seller can deliver title to the home free of any liens. The lien that the Internal Revenue Service has put on your home must be taken care of before a policy can be issued and the transaction can be closed.

Obviously, the easiest way to remove the IRS lien would be to pay it right away. If you don't have enough cash in a savings account to pay it off, perhaps you can raise the money by selling stocks or other assets that you own or by taking out a short-term loan.

Discuss your alternatives with the IRS, the title insurer and the escrow officer or closing attorney who is overseeing the transaction. You might be able to work out a deal to have the tax lien automatically paid off with part of the proceeds from the sale - much like some of the proceeds will be used to pay off any outstanding mortgage that you owe on the property.

Tax liens can sometimes take awhile to be removed, in part because the IRS bureaucracy moves very slowly. So, it's important to get to work on the problem now instead of hoping you can solve it at the last minute.

- David W. Myers is a 20-year veteran of the newspaper and magazine business, having previously covered real estate for the Los Angeles Times and Investor's Business Daily.

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