Question: We purchased a home in Arlington, Virginia, last October for $560,000. The property appraised for $570,000. We obtained a fixed rate first trust in the amount of $448,000 at 6.50 percent and a $112,000 second trust at a rate equal to prime plus 2.50 percent.

Since the prime rate keeps rising, our second trust payment keeps rising. We called the company that holds the loan who said they were able to fix the rate at 8.875 percent. It seemed a little high to us so we called a few banks. Everyone we spoke to said that they couldn't help us because we have no equity in the property. Do you think we should take the 8.875 percent fixed rate second trust? We do not want an adjustable rate anymore. We have great credit and good income.

Answer: I suppose your situation is a good example of why I chose my career as an independent mortgage broker, rather than a bank employee. Good mortgage brokers work with dozens of lenders and have literally hundreds of mortgage programs available. A mortgage broker's job is to assess his clients' current situation, determine his clients' objectives and then make recommendations based upon the interest rate environment and the programs available.

Your objective is to eliminate interest rate risk on your second trust. It's a great idea, seeing as short term interest rates have been rising and long term rates have been falling. But let's think outside the box. Your situation suggests that more investigation is warranted. Here's what I would do if I were your mortgage broker.

First, I would check with one of my trusted appraisers to see if the property has appreciated since you purchased the house. Arlington County, Virginia, continues to experience rapid real estate appreciation. You are making a possibly false assumption that you have no equity in the property. Last October your property appraised for $570,000 -- $10,000 more than the purchase price. For you to have five percent equity, the property would need to appraise for about $590,000 -- $20,000 more than the October appraisal. That's only a 3.50 percent increase.

I bet an appraiser can find some recent comparable sales that would support a value of $590,000. This would turn your 80-20 situation into an 80-15-5 scenario, and will make you eligible for many more programs.

The next thing I would do is look into refinancing your first trust. 6.50 percent is not competitive compared with today's rates. Since you have very little equity in the property, I would suggest a zero closing cost refinance. In exchange for a slightly higher interest rate, the mortgage broker pays all of the closing costs on your behalf.

As of this writing, I see that a zero cost "refi" for a thirty year fixed rate is running at about six percent. Shaving a half percent off your mortgage rate and paying no fees whatsoever makes plenty of sense.

Now let's look at your second trust. I see that as of this writing a fixed rate is running about 7.25 percent with no points. Total closing costs would run in the range of $500.

Now let's summarize the plan with the assumption that your house appraises at $590,000. You currently have $560,000 in mortgage debt ($448,000 + $112,000). Your new first trust would be equal to 80 percent of the appraised value, equaling $472,000. You would refinance with no closing costs to a six percent rate. Your new second trust would total $88,000, which would be locked in at 7.25 percent with minimal fees.

Clearly, this arrangement is far preferable to keeping your 6.50 percent first trust with a $448,000 balance and refinancing a second trust for $112,000 at 8.875 percent.

Now, what happens if the appraisal doesn't support $590,000? There are products available to refinance to another 80-20 situation. The interest rates may be a quarter percent or so higher, but still far lower than your current situation.

The bottom line is this: In order to develop the best mortgage plan that meets your needs, you must have a solid understanding of the mortgage products available. If not, an experienced and reputable mortgage consultant can save you some money.

Published: July 7, 2005

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