When Refinancing a Low-Cost Loan Pays Off : Savings: Taking out a new first mortgage to raise additional funds can be cheaper than refinancing a second or getting an equity credit line.

Questions about refinancing, equity-sharing and adjustable-rate mortgages recently dropped out of the mailbag:

Carol Conrad has lived in her San Pedro home for several years. She owes about $30,000 on her 7% first mortgage and her monthly payments are about $230.

She also has a relatively new second mortgage with a balance of $48,000. Payments on this 15-year, 12 1/2% loan are $616 each month.

Now, Conrad would like to borrow another $50,000. “I don’t want to touch the 7% (first) mortgage because the rate is so low,” she writes. “Should I refinance the second mortgage and take out an extra $50,000, or should I just take out a home-equity credit line?”

Believe it or not, the best idea might be for Conrad to give up that 7% mortgage and take out a brand-new loan at today rates to pay off both the first and second mortgages, plus get the extra $50,000 she needs.

It’s a simple matter of mathematics. Right now, Conrad is paying a total of $846 each month--$230 on the 7% loan and $616 on the second mortgage.

If she refinanced her second mortgage at the same 12 1/2% rate and drew out an extra $50,000 in cash, monthly payments on the new second--assuming it’s a standard 15-year term--would be $1,208. Add that to the payments on the first, and the total would be $1,438 each month.

A better alternative would probably be to take out a brand-new first mortgage for $128,000. The first $30,000 would be used to pay off the existing first loan; another $48,000 would pay off the second. That would leave $50,000, which is the amount that Conrad wants to borrow.

Assuming that the new, $128,000 first-mortgage loan carries the going rate of about 10% and is spread out over 30 years, monthly payments would be $1,124. That’s $314 a month less than Conrad would pay if she kept her 7% first mortgage and simply refied her second to get the extra $50,000 she needs.

Rates on first mortgages are typically between 2 and 3 percentage points lower than rates on second mortgages. That’s because, if a lender must foreclose on a second mortgage, the lender who made the first mortgage will get paid off first.

If proceeds from the foreclosure sale aren’t enough to completely pay off the second, the lender who made the second will lose money. As a result of this heightened risk, lenders who make second mortgages charge more than lenders who make only firsts.

If she doesn’t want to take on a 30-year commitment, Conrad could easily find a lender willing to make a 15-year loan for $128,000. Payments would probably be about $1,356--still about $80 a month below what she’d pay if she kept her current first mortgage and refied the second.

Conrad’s alternative plan to take out a home-equity line of credit probably wouldn’t work. Most credit lines are considered second mortgages because they’re secured by the property itself.

If Conrad didn’t pay off her current second mortgage, the credit line would probably be considered a third mortgage on the home and the rate could be well above 15%.

Bob O’Toole, who reads this column in the Philadelphia Inquirer, recently bought a house with a friend of his.

O’Toole and his partner each put up half of the down payment. Each one makes half of the monthly mortgage payment, pays half the property tax bill, and plans to evenly share resale profits when the house is eventually sold.

O’Toole’s question: “Can I also take depreciation deductions for the half of the house that I don’t live in?”

The answer is probably “no.”

“The house isn’t producing any rental income, so it can’t be depreciated,” said Jim Sims, a Santa Barbara realtor and equity-sharing pioneer.

“It’s sort of like when a husband and wife buy a house together,” Sims said. “Neither one can depreciate the half of the house they don’t own.”

However, Sims added, O’Toole might be able to increase his tax deductions by restructuring how the property is held and how the mortgage is paid.

For example, perhaps O’Toole could buy out his partner’s interest and then rent back half the house to him.

O’Toole would get all the mortgage interest write-offs and might also be able to take depreciation deductions for the half of the house that’s considered “rental property.”

The two partners might also be able to work out a deal that will still give O’Toole’s “tenant” part of the eventual resale profits.

Since equity sharing involves some complex tax and legal issues, it’s important to get the help of a lawyer, realtor or other expert who has put together successful deals in the past.

There aren’t many good books on equity sharing. Sims himself wrote one of the better ones: “Share and Grow Rich” (Altaverde Publishing, 1125 Arbolado Road, Santa Barbara, Calif. 93101; $21.30, including postage and handling).

Another good book that suggests an alternative way to set up an equity-sharing deal is published by Independent Research and Information Service, 2221 Barry Ave., Los Angeles, 90064.

The book costs $32.95, including postage and handling, and is simply called “The IRIS Personal Investment Report on Shared Equity Investments.” (California residents must add $1.87 sales tax).

Importantly, both of these books have sample contracts that can be used as a basis to fashion your own agreement.

Millions of homeowners in California and across the nation have adjustable-rate mortgages with an interest rate that rises and falls according to changes in the 11th District Cost of Funds Index.

Over the past several months, some readers who have ARMs linked to this index have gleefully reported that their loan rate and monthly payments have declined because the index has been dropping.

But Betty King of San Bernardino complains that her ARM, which is also linked to the 11th District Cost of Funds, has gone up. “I want to know why, especially because all my friends (who have ARMs) say their rates have gone down.”

First, it helps to know exactly what the 11th District Cost of Funds is.

The index, calculated each month by the Federal Home Loan Bank of San Francisco, reflects the composite rate that about 170 Western savings and loan associations and savings banks pay on savings accounts, checking accounts and other types of deposits.

The index has generally been falling over the past several months. It currently stands at 8.05%, down from about 8.4% at the start of this year and nearly 9% just 18 months ago.

It’s hard to say why King’s payments have gone up instead of down because she didn’t provide much detail in her letter. Perhaps it’s because the loan is relatively new: Many ARMs start out with below-market introductory rates that last for a year or so, but then ratchet up to market levels in the second or third year.

Of course, it’s also possible that the lender simply erred when it calculated King’s new payment. So, it would be a good idea to contact the lender’s customer service department to make sure the new payment was computed correctly and to clear up any other questions.

You can get a free brochure that provides more detail on the cost of funds index and a chart that shows how it has changed each month over the past five years by writing to Communications Department, Federal Home Loan Bank of San Francisco, P.O. Box 7948, San Francisco 94120.

Letters and questions may be sent to Myers at the Real Estate section, Los Angeles Times, Times Mirror Square, Los Angeles 90053. Questions cannot be answered individually. AVERAGE RATES FOR RESIDENTIAL MORTGAGES Average rates for residential mortgages as of Dec. 23, 1990.

Survey Conventional Mortgages Adjustable Mortgages Area 15 Year 30 Year Composite 1 Year Composite National 9.38% 9.66% 9.54% 7.88% 8.16 California 9.60 9.85 9.73 8.21 8.18 Connecticut 9.38 9.72 9.58 7.93 8.14 Wash. D.C. 9.20 9.50 9.36 7.50 7.80 Florida 9.32 9.60 9.48 7.72 8.04 Mass. 9.38 9.69 9.55 7.98 8.37 New Jersey 9.44 9.70 9.59 7.85 8.28 N.Y. Metro 9.49 9.78 9.66 7.94 8.28 New York 9.58 9.87 9.75 8.03 8.33 N.Y. Co-ops 9.78 10.01 9.95 8.25 8.68 Pa. 9.10 9.43 9.27 7.57 7.71 Texas 9.13 9.40 9.27 7.86 7.97

SOURCE: HSH Associates, Butler, N.J.