REAL ESTATE TOPICS...Weighing the costs of maintaining a second home you no longer love vs. selling it at a loss

By Ilyce Glink and Samuel J. Tamkin

In 2004, I purchased a condo in North Carolina. I took out a 30-year loan at 5.5 percent. The condo is our second home. We live in Washington, D.C., about four to five hours from the condo.

Our primary home is paid off, so the condo serves as our principal tax deduction. We are both retired, but with pensions we fall into the 28 percent tax bracket.

My mortgage company is offering refinancing packages to reduce the (relatively) high interest rate we’re paying. The outstanding balance on the loan is about $120,000. We purchased the condo for about $230,000.

I’m thinking about refinancing to a 15-year loan at 3.25 percent. The monthly payment would be about the same but save me $35,000 or more over the loan term. We’re now seniors in our late 60s, and I don’t want to be paying mortgage into my 80s. We will never move to the condo and have become more discouraged with owning it.

The area the condo is in has not recovered from the recession and is located in an agricultural region. Our recent tax assessment placed the value of the condo at $119,000. My wife thinks I will have extra costs with refinancing, but the mortgage company says that they will not charge for the appraisal and because I have been a customer with them over 10 years, they are offering me reduced refinancing costs.

I don’t want to sell at a significant loss. What are my options, and what do you think is the best course of action?

We don’t know what the real estate market will bring for the condo market where you are. You’ll have to gauge that yourself with the help of some real estate brokers in that area. We guess that you would be best off determining the condo’s value now and the prospects of its increasing in value over the next five to 10 years.

Because you don’t plan to move to the condo as a primary residence, the question you should be asking yourself is how often you and your family use the second home and what burden it places on you (in terms of management) and your finances. If you and your family rarely use the condominium, you have something that’s costing you money without giving you any other sort of benefit. You have to pay the real estate taxes, assessments, insurance and utilities while you own it, plus any added maintenance and upkeep. Those expenses add up.

We know you don’t want to take a loss on the condominium, but you might want to consider selling it if you don’t really use it, aren’t interested in renting it, and determine that values in that area aren’t going anywhere for the foreseeable future. Now, if you use the condominium or you think that values will increase in the next couple of years, you could hold onto the condominium and sell it then.

Once you decide what to do with the condominium, you can decide whether refinancing is right for you. We say that because, if you decide to sell in a year or two, it may not make sense to refinance. If you do want to refinance, you have a couple of choices: You can refinance the condominium or refinance your current home.

The good news that either property you refinance may yield the same tax benefits. When you talk about the tax benefits you get out of the loan, you should remember that those tax benefits are good but may be somewhat obscured by your income, IRS limitations and other IRS tax rules.

We can’t say for sure what refinancing the condominium loan does for your federal income taxes, but we know that lowering your interest rate will save you money over the long term. And, if you’re in it for the long run, that’s a great thing.

Based on your situation, we would like to see you benefit from lower interest rates, but you need to do your homework. Lenders don’t come to you simply to give you a good deal. They come to you when they want to make money. So you have to shop around. Your current lender may be offering you a great deal, but by the same token, there may be other, much better deals out there.

You might find, for example, that other lenders are offering 15-year mortgages for under 3 percent, with fewer fees and a lower overall cost. We would like you to talk to other mortgage brokers, mortgage lenders and, if you are a member, credit unions. Once you do that, you can see what the fees are for these lenders and see if you are truly getting the lowest interest rate and the lowest fees on the refinancing. You can do that also on your current home if you get a better deal there (which you might, if you’re refinancing a primary residence rather than a vacation home). In either situation, the best deal for you can cut down your debt payments over time.

If you were to refinance but then sell shortly thereafter, you might have spent money refinancing and not get the benefit from that refinancing.

Say you pay $2,000 to refinance and sell six months later, you won’t benefit from the interest rate reduction over those six months. Instead, you’ll be out the cost of refinancing. But if you don’t sell and keep the home for the long term, you certainly will save a bundle.