Your Realtor shows you exactly the Santa Fe home you've been looking for, the price is right, and you have the assets for a down payment. That little voice inside your head is telling you that you MUST buy this house. The only sticky problem to deal with is the unsold property in the other state.

You were counting on selling that home first to keep the mortgage payments lower on the new residence in Santa Fe. But if you wait for that property to sell, or you include in the purchase contract that the sale of the property in the other state will be a condition of the purchase of the property in Santa Fe, you will likely lose the perfect house.

I see this scenario in Santa Fe fairly often. Many times, the out-of-state property has no debt against it, or the payments are low enough that the borrowers can qualify for the mortgage on the new property along with the mortgage on the old property. If so, we can move ahead and secure the financing to purchase the new residence. When the other property sells, I can recast the existing loan on the new house and use the equity from the sale of the old property to reduce the principle balance on the loan and thereby the monthly mortgage payment. This is not a refinance and you won't have to suffer all of the refinance fees. The cost to do this is usually $100 or less.

Say the purchase price of the new property is $500,000 and you put down 20 per cent, making the loan amount $400,000. Your new mortgage of $400,000 at an interest rate of 5.15 percent for 30 years equals $2,184.10 per month for principle and interest (P&I). Your other home sells in six months and you now have an additional $200,000 that you want to apply to the principle balance. If you simply pay down the balance, your monthly P&I will still remain $2,184.10, but you will pay the note off sooner. Or, I can recast the mortgage so that you now owe $200,000 (for simplicity I'm assuming no principal has been paid in the first six months) at 5.15 percent for 29 1/2 years and the new P&I will be $1,311.92.

The rules that govern this loan modification are fairly straightforward: 1) it has to be a "large principle reduction" (think $10,000 or more); 2) the loan program does not change, (so fixed rate remains fixed rate); 3) the interest rate remains the same; 4) the loan will be amortized over the remaining period of the loan so that the note has the same maturity date; 5) the first mortgage payment at the higher monthly total has to be made (even though this recast can be put into effect sooner); and 6) it has to be done through the same investor (Fannie to Fannie or Freddie to Freddie).

The obvious benefit here is that the borrower can purchase the new home without worrying about the immediate sale of the other property, and then reduce the principle balance and the monthly payment when it does sell.



David Hultin (505-946-2521) is a residential mortgage-loan officer for New Mexico Bank and Trust. He previously worked in the mortgage divisions of two of the largest banks in the United States.