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# Your Mortgage : How to Decide If You Should Refinance

November 19, 1989|Special to the Times

QUESTION: My home has a mortgage balance of about \$67,500, a 9.5% interest rate and a \$840.05 monthly payment. However, the house is worth at least \$175,000. I am thinking of refinancing to use some of my equity to buy real estate for investment. But my friends tell me I would be crazy to refinance a 9.5% interest-rate mortgage. What do you advise?

ANSWER: If you obtain a conservative new 10% interest-rate mortgage for 75% of your home's market value, that \$131,250 mortgage will have a \$1,151.81 monthly payment. For the \$311.76 increased monthly payment you will have about \$63,750 cash available, less loan costs.

The way to compare these two loans is to evaluate their loan constants. To arrive at the loan constant, divide the sum of 12 monthly loan payments by the mortgage balance. Your current loan's constant is 15% (\$10,080.60 divided by \$67,500). But the proposed new loan's constant is only 11% (\$13,821.72 divided by \$131,250). Since the new loan has a 4% lower loan constant than your old loan, refinancing your home looks like a good idea if your have a profitable use for the borrowed money.

Second Mortgages OK in VA, FHA Sales

Q: We plan to sell our home soon. It has a 9.25% interest-rate assumable VA mortgage. If the buyer makes a 15% cash down payment, are we allowed to carry back a second mortgage even though the first loan is insured by the VA?

A: Yes. On home resales, second mortgages are allowed whether the buyer assumes or takes title subject to an existing VA or FHA mortgage.

Should He Refinance or Get Second Loan?

Q: We have decided to spend about \$25,000 to improve our home. Our alternatives for paying for the improvements are to get an improvement loan from our bank at 12.5% interest or refinance our first mortgage, currently at 8.75% interest, with a new loan at about 10% interest. Which do you recommend?

A: Unfortunately, you didn't give the amount of your current first mortgage. But unless it is for a very small amount I would be reluctant to give up that beautiful 8.75% interest rate. If you can afford the additional payments on a \$25,000 second mortgage at 12.5% interest, that is probably your best alternative.

Mortgage Forgiveness Is Taxable Income

Q: Three years ago, we borrowed \$20,000 from a private party, secured by a second mortgage on our house. We have been paying interest only and there will be a \$20,000 balloon payment in about two years. The lender wrote that she needs \$15,000 and will consider the debt paid in full if we pay her \$15,000 by Dec. 31, 1989. If we borrow the \$15,000 from a friend, will our \$5,000 saving be taxable to us?

A: Yes. Mortgage forgiveness on a hard-money loan is taxable income to the borrower. However, even if you pay \$1,400 federal tax at a 28% rate you will have saved \$3,600. That is a superbly profitable deal. Ask your tax adviser for further details.

Second Mortgage Helps Secure First

Q: We are in the process of buying a home and shopping for a mortgage. The lender offering the best fixed-interest rate loan wants a half-percent more if our seller carries back a second mortgage. Is this customary?

A: No. Some mortgage lenders still think a first mortgage is riskier if there is also a second mortgage on the property. So they charge higher interest rates in that situation.

But the truth is, a second mortgage adds security for the first mortgage lender. When there is a second loan, if the borrower defaults, the second mortgage lender will usually step in to make the payments on the first loan, thereby preventing foreclosure, which could wipe out the second loan.

First-mortgage lenders should charge less, not more, when a second mortgage is involved because the first mortgage lender's security is greater, not less. I suggest you shop around for another lender who doesn't charge a higher interest rate if your new home has a second mortgage.