Q. I currently own a home the mortgage rate is 5.65% the amount owed is $120,000. The home's value is $145,000 or more. The current payment is $900. I am divorced and wanted to sell the house to buy something cheaper to get my payment in the $600 range where I can afford it. Given the rise in mortgage rates the last few months would I be better off to take the house off the market for now and hope the rates go back down some time next year and then sell or just stay put? It has been on the market for eight months and although it has been shown many times I have not received any offers.
A. Assuming that you are paying 5.65% on a 30-year fixed-rate mortgage, your current $900 monthly payment probably breaks down something like this -- $700 in principal and interest, and $200 in taxes and insurance.
To lower that payment to $600 a month – about $450 in principal and interest, and $150 in taxes and insurance -- at today’s average mortgage rate of 6.7%, you’d be able to borrow about $70,000.
Subtracting the amount you owe on your current house from the conservative value of your house, you have about $25,000 in equity. If you received that much from the sale of your house and used it on a down payment for a new home, and borrowed $70,000, you’d be able to afford a $95,000 home.
Can you buy a home you would enjoy for $95,000? In some parts of the country you could get a lovely three-bedroom house. In others you couldn’t get a decent studio condo. (You didn’t tell us where you live.) But if the answer is “yes,” then moving would still make financial sense, even though interest rates have gone up.
There’s another serious issue here, however. You can’t get rid of your $900 a month mortgage until you sell your existing house.
Since the house has been shown many times over the past eight months, you need to ask your real estate agent why you haven’t received any offers. Are you asking too much? Do you need new carpet or paint to make the interior more attractive?
A good agent should have talked to the potential buyers and their agents to find out what they’re saying about your house – and why they aren’t buying it.
Moving is moot until that problem is solved.
Q. I came across the terms “tax lien” and “tax sale” and wasn't sure if they are the same. How does a tax sale work? If the government put a lien against a house, what will happen to the existing loan from the lender?
A. Let’s look at what a tax lien and tax sale are, how they work, and at what happens to the property and any outstanding loans or mortgage attached to them when they are imposed.
This, however, is only a general overview. The laws and regulations governing their use vary from state-to-state and, quite often, within the different counties, cities, municipalities, taxing authorities or even property owners’ associations in each state. So talk to an attorney familiar with the rules being used where the property is located.
In real estate terms, a tax lien is a claim or judgment against the property. The property owner owes property taxes on a specific piece of property to a specific taxing authority. The court places a lien on the property and rules that once that property is sold, the person with the lien gets paid, plus interest. The money will go directly to the lien holder. The escrow company or escrow attorney handling the transaction hands out the money, and the person selling the property has no say-so in the matter, since paying off the lien is a court-mandated condition of sale.
In some cases, a taxing authority will sell the lien instead of the property. This is sometimes called a tax certificate sale. Let’s say the owner owes the city $1,000. A third party pays the city that $1,000 and then puts a personal lien on the property – plus interest. These are sometimes sold at auction. So, when the property is sold, the third party gets the $1,000 plus interest. It’s worth noting that the property owner has no say at all in the amount of interest being charged. That is set either by the taxing authority or, when the lien is sold, by the person buying the lien.
In terms of a tax sale, the taxing authority – or the person who bought the lien – forecloses on the property and then sells or auctions it to recover the money it is owed. As we’ll see, however, this can lead to court battles.
When this happens – and it does happen – the property can be separated from the mortgage and from any other claims against it. The value of the property is not the issue, just the back taxes.
Bill Slocumb, a Bakersfield, Calif., attorney and real estate expert, explains that in a case like this, “the person who buys the house usually gets it free and clear of all liens. So the mortgage holder gets wiped out. This really happens.” If the person who owned – past tense – the property still owes money on it… the person still owes the money. “A mortgage is a promissory note – call it an IOU – secured by the property. The property is what gets sold. The IOU, however, is still valid. You still owe the mortgage company the money and they can still come after you for it. And they will.”
Slocumb points out that “you can take real estate courses that claim to teach you how to buy tax liens and tax sales and become a millionaire.” The courses talk about buying million-dollar homes for only a few thousand dollars. But the courses don’t really go into the details, all the different rules and regulations that have to be followed in different locations, how many people and companies you will be competing against, the types of properties that normally fall into this category, or about how hard it is to actually make any money at it. Nor do they point out that these sales can be challenged, and that court challenges can be expensive. In April, UPI reported that the U.S. Supreme Court ruled in favor of a Little Rock, Ark., man who claimed that the state failed to take reasonable steps to warn him that his house would be sold for back taxes.
The time between missing a tax payment and the lien or the property being sold depends on the state and the agency collecting the taxes. In any case, the taxing agency is required to attempt to let the property owner know that the property is in danger.
Slocumb says that if you are thinking about buying or bidding on a tax lien, certificate or sale, “first talk to a lawyer who specializes in them in that area.”
If you would like to avoid getting caught up in a tax lien or tax sale, arrange your home loan so that your mortgage company makes your regular property tax payments automatically for you.
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