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Don't pay cash for home in unfamiliar area

My townhouse is worth about $300,000. My mortgage balance is around $46,000. I believe I can buy a small house for under $200,000 in Arizona. Does it make sense to buy the new house with no mortgage? What if I find that house before I sell my current home?

If you commit to buying a $200,000 house in Arizona for all cash before selling your current home, you might be in financial trouble unless you have $200,000 in spare cash. Instead, I suggest you include a mortgage contingency clause in your purchase offer for a 75 percent or 80 percent mortgage just in case your townhouse doesn't sell as quickly as you anticipate and for as much money. More important, I recommend you not commit to paying all-cash for a home in an unfamiliar area. It just isn't smart to put all your eggs in one basket, especially if you're a newcomer.

Maybe you won't like the famous Arizona "dry heat" summers. Worse, suppose the zero-mortgage home you buy has lots of unexpected defects, but most of your nest egg is tied up in that "lemon house."

After you have lived in your Arizona house for a few years, if all is well, then paying off your mortgage would be a smart idea to save interest. For this reason, be sure the mortgage you obtain does not have a prepayment penalty.

Refinance, keep credit line

My wife and I have a first mortgage at 7.5 percent interest. We can refinance for around 6 percent, resulting in huge savings. But we have a $100,000 home equity credit line at one-quarter percent below the prime rate. We like this home equity loan very much because of its flexibility. It's great to write a check for $20,000 or so when we need something. Then when we have surplus cash, we pay down the home equity credit line. Is there any way we can refinance our first mortgage without touching the home equity loan?

Yes. That's easy. Just ask your home equity credit line lender to subordinate that second mortgage to a new first mortgage. Most home equity lenders will be glad to do so because they don't want to lose you as a profitable customer. Usually all that is required is for the junior lender to sign a recordable subordination agreement. I am surprised your new first mortgage lender didn't explain subordination to you.

Deeding home is a bad idea

I am 76 and in pretty good health, but I am short of income. My daughter and son-in-law offered to make my mortgage and property tax payments if I will deed my house to them, retaining a life estate. They have excellent income. My son-in-law owns his business, which is very profitable. What do you think of this idea?

I don't like that idea at all. Gifting your home to your daughter and son-in-law is very good for them, even though you retain a life estate. But you will lose control over your home. Suppose in a few years you need to move to an assisted living home. How will you pay for that care if you've already given up your home and its equity? A far better alternative for you is to obtain a reverse mortgage to provide the income you need for the rest of your life. But you still control your home. If you decide to sell your home in the future so you can move to an assisted living residence, you can then make that decision.

Get your name on the title

My companion and I are registered domestic partners and have been together for 14 years. If we sell our home, does my partner (whose name is the only one on the title) get to deduct only the $250,000 principal residence sale deduction, or can she deduct $500,000? If I were on the title with her jointly, could we then deduct up to $500,000 profit?

Because your name is not on the title to the home, only your partner is entitled to deduct up to $250,000 principal residence sale profits allowed by Internal Revenue Code 121. However, if your name is also on the title, then you will also be entitled to deduct up to $250,000 tax-free principal residence sale profits. To qualify, (1) your partner should sign and record a quit claim deed to you for a half interest in the home and (2) you need to hold title at least 24 months before becoming eligible for your $250,000 exemption. Both of you must meet the occupancy test: that you've used the house as your principal residence for an aggregate 24 months out of the last 60 months.

You can send e-mail to Robert J. Bruss by visiting his Web site, Click on "Ask Bob a Real Estate Question." Or write to Robert J. Bruss, 251 Park Road, Burlingame, CA 94010.

Harney on vacation

Housing columnist Kenneth R. Harney is on vacation. His column will resume Jan. 15.