How to tell if lender is overcharging escrow account

Federal law imposes maximum limits on financial cushion

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Nov. 28, 2012

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DEAR KARL: If it is any consolation, you are not alone. I have represented too many brothers or sisters with the exact same facts.

There are a number of suggestions -- some that require consent from both of you and some that only one of you can do.

Let's take the first category. You can arrange to rent the house to your sister, whereby she will pay you rent at half the market rates. Why half? First, because she is your sister, but more importantly, she owns half of the house and clearly will be more concerned about taking good care of it than if she were just a regular tenant.

Another suggestion: She can buy you out by giving you a promissory note and a deed of trust (called a mortgage in some parts of the country). You can make the monthly payments conform to her budget, and have a balloon note whereby the entire balance comes due on a date mutually agreed upon.

Of course, if she cannot afford to rent or buy, then in my opinion, she should not be living rent-free in the house. You should both agree to sell it, and divide the proceeds equally. Keep in mind that your basis for tax purposes is the stepped-up basis; namely, the value of the property on the date that your last parent died. So if it was valued at $300,000 on that date, and you sell it for that amount, neither of you will have to pay any capital gains tax. Of course, if you can sell it for more, then there will be tax to pay on that profit.

Interest rates are at an all-time low, and the housing market is gradually recovering from the mortgage meltdown. This is a good time to sell.

In the final analysis, if you are unable to get your sister to cooperate with one of the suggestions above, you can file what is known as a "partition lawsuit." This means that you file a lawsuit in the local court where the property is located, and ask the judge to force a sale.

Case law throughout the nation is clear: If two or more people own property and one wants to sell, the courts will force the sale.

I have been involved in many partition lawsuits, and tell all of my clients that the only winners are the lawyers, the trustees who arrange the sale and the speculators who buy. In other words, litigation should be the absolute last resort.

Both you and your sister should retain your own attorneys and have the lawyers try to work it out.

DEAR BENNY: We have been reading about reverse mortgages. We are in our early 70s, and our house, which is worth approximately $400,000, has a very low mortgage remaining. Can you provide us with the pros and cons of such a mortgage? --Tim

DEAR TIM: Reverse mortgages are not for everyone. I am especially concerned that younger homeowners (the so-called baby boomers who are now age 62) are starting to obtain these reverse mortgages. Because of the high costs of these loans, these seniors may end of having little or no equity (no money) as they get much older. According to a recent study reported by the Consumer Financial Protection Bureau, in 2011 almost half of reverse mortgage homeowners were in their 60s.

That is perhaps the biggest negative. A reverse mortgage carries high costs -- both when you first obtain the mortgage as well as on a continuing basis. For example, the federally insured home equity conversion mortgage (HECM) allows the lender to charge an origination fee that –depending on the value of your home – can exceed $5000. Additionally, the borrower has to go through the normal settlement (escrow) proceedings, paying such costs as title search, title insurance, appraisal and closing fees.

On the plus side, however, it can provide a homeowner with a sum of money (which can be taken out in one lump sum or in periodic installments) and that money does not have to be repaid until (1) the home is sold, (2) the borrower(s) move out or (3) the borrower(s) die.

I suggest you do a lot of homework before you make your decision. One good source of information is AARP at www.aarp.org.

Benny L. 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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