Pay off mortgage in 8-9 years

Q: I own a home. In 2004, I refinanced and got a $200,000, 15-year loan at 5.25 percent. For one year I paid an extra $500 per month. I now owe $125,000. I am still paying one-twelfth of the payment each month.

I am not sure how many years I have left at this point due to all of my prepayments. I want to pay the house off in the next five years. How much do I need to add to my monthly payment in order to pay off the house in that time frame? Also, do lenders allow biweekly programs? I just send in payments twice a month.

A: You haven't quite provided me with all of the information I need to calculate exactly what you have to do to pay off your loan in the next five years, but I've pulled some general numbers that I think will help you figure out what's going on.

First, congratulations on prepaying your mortgage. You're doing a great job of building equity in your home. If you prepaid an extra $500 per month on your $200,000 loan at 5.25 percent, it would take you four years to pay down the balance to $125,000. Since you're about four years into your loan term, I'm guessing that you've actually been paying $500 per month all this time, not just for one year. That's how you'd get to about $125,000.

If you prepaid the loan for only one year, I'm wondering if you made any extra prepayments on top of that amount. Going forward, if you paid the $500 monthly plus $1,607 per year, that works out to $634 per month. At that rate, you'd pay off your loan in around nine and a half years, depending on when you made the extra $1,607 payment (I calculated it as if you added an extra $634 to each monthly payment, although if you paid the $1,607 in January of each year, you'd pay off your loan slightly faster).

Since you got your loan in 2004, you'd pay it off in 2013, or about five years from now.

If you paid a total of $750 extra per month, you'd pay off your loan about six months faster. If you upped your monthly prepayment to $1,000, you'd pay off your loan in about eight years total.

When it comes to biweekly payments, many lenders will charge you to set that up. But you can make any prepayments yourself, without paying a fee.

There are accountants and others who might be able to audit your mortgage account. They would look at all of your prepayments and calculate for you with greater specificity what you would need to pay going forward in order to pay off your loan when you want.

Good luck in reaching your goal.

Q: We are builders and we have a buyer who wants to buy one of our houses as a gift for his brother. He is giving us earnest deposit checks for less than $10,000. Are there any problems with this?

A: From your perspective, you need to follow your sale of the home as you would any other sale. You and your buyer should sign a purchase agreement for the sale of the home. If the buyer wants to designate a different person to receive title to the home upon settlement or closing, you should specify that in your contract. Your real estate attorney should review your contract and documentation to make sure you have done things right.

When you go to settlement or closing, you would treat the transaction in the same manner as any other. Your documentation would show the sales price and the costs to close the transaction would be the same. If you are required to disclose the sales price and pay any transfer taxes, you would pay the amount owed based on the sales price of the home.

Your buyer would pay all expenses based on that purchase price and if your buyer designates his brother as the owner of the property, you might need your buyer and his brother to sign the various documents required for settlement or closing. You need to remember to paper your file, report the transaction and handle the transaction as a sale and as you would any other one of your sales.

Are there going to be legal repercussions for your buyer and his brother? Perhaps.

You'd be doing your buyer a favor by suggesting that he may want to discuss the situation with his attorney, tax preparer or estate planner. Your buyer's gift of the home to his brother would likely result in the buyer having to report the gift to the IRS. The gift may or may not benefit him in the long term depending on how much money he has and his estate plan.

If your buyer is trying to transfer some of his wealth to his brother, there may be far better ways. By consulting with a competent estate planning attorney, your buyer may find other opportunities to transfer his wealth while benefiting his estate plan.

To get even more valuable advice from Ilyce, visit her Personal Finance and Real Estate Center.

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