Smart Money: Refinancing sensible only if numbers work out

Bruce Williams is a national radio talk show host and syndicated columnist

Dear Bruce: I paid $141,000 for a house 7-1/2 years ago and have a 7.5 percent, 15-year mortgage. I owe about $50,000 and want to refinance, but I don't want to pay the associated fees. At another bank, I have a $50,000 adjustable rate home equity line of credit, currently at 5.25 percent, and would like to use it to pay off my mortgage. Does it make sense to do that? S.G., Mississippi State University, Miss.

Dear S.G.: I can understand why you don't want to pay the fees to get a lower mortgage, but there are costs involved in refinancing. Don't begrudge the lenders the fees. You should be able to reduce your 7-1/2 percent mortgage to about 6 percent. It's a matter of arithmetic how long it will take to overcome the refinancing fees? Take $50,000 as an example and assume refinancing will cost $1,000. You will save about 1.5 percent annually, which is $750. In a little over a year, you will get your $1,000 back.

I would go out of my way to lock in today's low interest rates; I wouldn't consider an adjustable. The adjustable rate mortgage at 5.25 percent looks good now, but how good will it be in three or four years? It may not be particularly attractive now, but in a few years from now I believe that 6 percent money is going to look mighty fine.

Dear Bruce: Some time ago, you suggested in your column that a reverse mortgage might be appropriate for some people. You did recommend, however, that the company issuing the reverse mortgage should be FHA-approved. Can you give me information about such a company? N.D., via e-mail

Dear N.D.: I believe you misread what I said. I mentioned that there are now FHA-insured reverse mortgages. This does not in any way militate against the use of "conventional" reverse mortgage. The important factors are the age of the mortgagors the older they are, the better terms they will receive and the property value. If the equity becomes exhausted, the mortgagors will have the right to remain in the property for the rest of their lives. Only then is the property sold to pay the obligation.

Dear Bruce: I live in Las Vegas, and I constantly receive mail from financial companies that sell mortgage trust deed securities. The annual return of 13 percent or 14 percent sounds promising. Are they a good, secure investment? J.Y. Las Vegas, Nev.

Dear J.Y.: Ask yourself, in today's world, where certificates of deposit are paying a maximum of 4 percent and government securities even less, why would someone pay 13 percent or 14 percent unless there was a fair amount of risk? You know the answer to that: They would not and could not.

What they are doing, if I understand your question correctly, is, in effect, asking you to become a mortgage banker. You put up the money for people who wish to mortgage property. In theory, the property is worth a great deal more than the mortgage, and it can be foreclosed upon, etc. But you have to ask yourself: If someone is credit worthy, and the deal is a good deal, then why would anybody have to pay you 13 percent or 14 percent? On top of that, they are making a profit, which probably kicks the deal up to anywhere from 18 percent to 22 percent. Secure? I don't think so. Would I recommend it? No way!

Dear Bruce: My husband and I have separated and intend to divorce. I moved back into a rental unit that I owned before we were married. The neighborhood has gone down during the past eight years, so it is not appreciating. I planned to live here for two years to avoid capital gains taxes, but that may be difficult. I paid $62,000 for the unit and refurbished it. I can probably sell it for $82,000 with the help of a real estate agent. How do I avoid the taxes? In my position, what is the best way to move? S.V., Las Vegas, Nev.

Dear S.V.: I assume that you have been depreciating this property during the rental period so that the basis is considerably less than $62,000. However, you also mentioned that you had refurbished it, and unless you've expensed all those items, you would have a deduction against whatever gain there may be. You have indicated that you will probably use a real estate agent. The gain will be relatively modest, probably in the neighborhood of $15,000 to $20,000 at most. At the maximum 20 percent capital gain rate, the taxes will only be about $4,000. Not enough to justify doing all of this maneuvering.

Dear Bruce: We are retired with a high five-figure income, no debts, a small mortgage and good health. Our current residence has appreciated making a six-figure gain possible. Is there any advantage in taking the gain and relocating to a more affordable community? E.J., Simi Valley, Calif.

Dear E.J.: Since this is your primary residence, you and your spouse can keep everything you gain up to $500,000. Not a bad deal. Considering you appear to have sufficient income, the choice is yours to stay or move to a more affordable community.