Housing

Real Estate Q&A: Mortgage Rate Buydowns and Parent-to-Child Property Transfers

What are Mortgage Rate Buydowns? :: Mint.com/blog

Zillow real estate investment writer and long-term investor Leonard Baron, MBA, is answering questions from MintLife readers.

If you have a question about investment properties, cash flows, insurance, mortgage financing, homeowners associations, renting versus owning, foreclosures and more, drop Leonard an email.

Comparing Mortgage Rate Buydowns

Missy of Fairfax, VA asks:

I’m refinancing and have some mortgage rate options based on the number of loan origination points I am willing to pay.

Someone said if I’m going to own my home for a long time, I should pay the points to buy down my mortgage rate. Does that seem like sound advice?

No, that is not sound advice. This one seems simple, but it’s actually pretty complicated.

Would you pay, for example, 1 percent ($5,000) to save $500 per year in interest on a $500,000 loan?

That means it would take you 10 years to get back the $5,000 you spent to buy down your loan rate. And, 10 years is way too long to wait to get your money back.

This analysis is called payback period analysis. It helps you determine how long it would take you to get your money back.

You need to figure out how much the buydown – the points you pay – is going to cost you.

Also, how much are you saving per year in reduced interest?

Divide the cost by the savings per year, and you’ll have your payback period in years.

A smart analysis also depends on the type of asset or investment.

For a prepaid interest investment – the dollar amount for upfront mortgage-loan points you would invest – I’d say four years is a fair amount of time to wait for your money back.

After that, it becomes harder to determine whether or not your investment is a good deal due to all the risks involved. 

Parent-to-Child Property Transfers 

Lolani of Los Angeles, CA asks:

My father passed away years ago and unfortunately my mom doesn’t have long left. S

he is leaving me the family home, but I’m scared about the property taxes going up and having to sell the house because I can’t afford it.

How does the state calculate increased property taxes when someone passes away?

Do not fear – if your family home is in California, a law was passed in 1986 that addresses this very issue.

Thanks to Proposition 58, property transfers between parents and children are excluded from tax reassessment.

It’s pretty simple. If your parents gift, sell or transfer property to you – their child, stepchild or adopted-before-the-age-of-18 child – you can keep their current property tax assessment.

So, whatever your mom is paying, you will be paying as long as you file the exclusion from reassessment with your county assessor within three years of her passing.

I recommend talking to a good real estate Certified Public Accountant (CPA) before your mom passes away, though, to make sure you are handling all of the finances in the proper manner.

Leonard Baron, MBA, CPA, is Zillow’s real estate investment writer, a San Diego University lecturer and real estate due diligence expert. As America’s Real Estate Professor®, his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions.