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On money

Modifying your mortgage less expensive than refinancing

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times, published March 23, 2003

What sounds too good to be true usually is. However, some lucky homeowners have access to a deal that not only sounds great but actually is: mortgage modification.

If your lender offers it, you may be able to reduce the interest rate on your mortgage by paying a fee that is much less than you would be charged to refinance. There's no need for a new appraisal, credit report or title insurance policy. Some lenders offer it because borrowers who can take advantage of the deal are less likely to go elsewhere to refinance.

Thornburg Mortgage in Santa Fe, N.M., sends its borrowers periodic reminders to let them know they have the option of modifying their mortgages to the current interest rate for a $1,000 fee.

"If they wanted to modify every month, they could," said Ron Chicaferro, senior vice president. 'We have a department of five people who do nothing but modification."

At Third Federal Savings, by paying a $395 fee, you can trade your current interest rate to one just 0.125 percentage points above current rates, provided that Third Federal still holds your mortgage.

Unfortunately, not every lender offers such a deal. Instead of modification, many lenders offer "streamline" refinancing. There is less documentation and red tape, but it still involves a new mortgage, so it is not cheap.

Your original lender may have sold your mortgage to another company. If so, the deal available to you will depend on what the current owner of your mortgage has to offer.

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Q. I want to give each of my grandchildren $1,500 for their college educations. I am looking into the state college savings plans, but I am concerned that if the kids don't go to college, the state will get the money instead of them. How can I invest in their education and be sure that the money will be safe and that the kids will get it if they don't go to college? I have been thinking of an equity annuity. Does that sound sensible? Two are babies and one is 8 years old.

There are penalties for withdrawing the money from college savings plans for something other than college expenses, but they aren't that bad! If they don't go to college, the grandchildren will just have to pay taxes on the investment earnings plus a 10 percent penalty. If they do go, the withdrawals used to pay college expenses will be taxfree.

An annuity is not a good choice for college savings. Withdrawals will be taxed whether or not your grandchildren go to college and there will be a 10 percent penalty tax if they are younger than 591/2. College savings plans, also known as 529 plans, are a much better choice.

Other alternatives include EE or I savings bonds or a Coverdell Education Savings Account (formerly known as an Education IRA), which you could set up with a mutual fund company.

Savings bonds are good if you view this as a one-time-only contribution. If you think you or other relatives will be able to add to these accounts in the future, I suggest a savings plan or an education savings account.

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Q. What is the exemption from ATM on municipal bond interest? I plan on buying some muni bonds and cannot get a answer. Please help.

ATMs are those machines that hand out cash. What municipal bond investors need to know about is AMT, which stands for alternative minimum tax. The AMT is an alternative way of figuring out how much you owe Uncle Sam. You might have to use it if you qualify for a lot of tax credits and deductions under the regular income tax rules.

The interest on some types of municipal bonds is tax-exempt when figuring your tax the regular way but is taxable under AMT calculations. These bonds are called "private activity" bonds and are used to finance projects such as housing and student loans. If a broker tells you that a bond is "exempt" from AMT, it means that it is not one of those private activity bonds. Bonds issued directly by state and local governments for public purposes are exempt from the AMT.

If you are not subject to the AMT, the private activity bonds might be a good deal because they typically pay a little higher interest than non-AMT bonds. Your tax preparer can assist you in determining whether you need to be concerned about the AMT and, if so, how much AMT interest you could earn before it became an issue.

-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

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