Real estate matters: Mortgage Q&A

If a lender decides to write off the amount owed but not collected from a borrower, the borrower receives a benefit as a result of not having to repay that amount. However, if the borrower agrees to repay the amount unpaid after the foreclosure, then the borrower can and will continue to make payments to the lender until the loan is paid off.

The difference between what is owed and collected from a short sale or foreclosure by the lender is known as the deficiency. Once the lender writes it off, the homeowner is obligated to report the deficiency to the IRS. There is a temporary and conditional exception: Through the end of 2012, the IRS will not treat the deficiency on the sale of a principal residence as phantom income that must be taxed.

Still, it's a rental property, and there are limitations on what lenders are able to do when it comes to refinancing investment properties these days. Having you close credit card accounts might make the lender feel better about what you could borrow after closing. A better idea is to shop around among different lenders. Find a company that wants to work with you. Try a credit union, local or regional banks, or even an online lender. A local mortgage broker might know of other lenders that would be interested in refinancing your loans.

The biggest problem you have, however, is that your loan is only going to last for five more years (unless it converts to a one-year adjustable at the end of that time and starts the amortization process). At that time, you will need to be in a position where you can qualify for a refinance. It seems you would not qualify now, with the strict financing requirements.

If home values don't rebound in five years, you would have to come up with hundreds of thousands of dollars in cash so the loan-to-value ratios work. You might want to reconsider selling or renting your property.

If you have other rainy day cash available, and you are just wondering when is the optimal time to prepay your mortgage, then the question you have to answer is, what is that cash doing now? If it is in a savings account earning nothing, and you can prepay your loan that is costing you 4 percent (let's say), then you've effectively earned 4 percent on that money. It's good money sense.

You should talk to a good mortgage lender or mortgage broker to walk through your options. Ask him or her to tell you what your rate and costs would be on your new loan if you put down $30,000 or $60,000.