Refinancing home can make good sense - and investment dollars

Until a few weeks ago, Paul Koehler had a 131/2 percent combined mortgage on his house. That was a little high, but it was a 30-year fixed mortgage, where the payments would have remained the same. Now Mr. Koehler has an 11 percent mortgage, but it is adjustable and the rate could go to 15 percent or higher in a few years.

Why? By refinancing, Koehler has freed up some $65,000 that can now be used for investment, for his children's college expenses, or some other need. Koehler , who is national tax director at Fox & Co., a Denver-based accounting firm, says his situation is similar to that of many homeowners: Over the last several years, they have developed fairly substantial equity in their homes.

In some cases, the unpaid balance on their loans is quite low in relation to the fair market value of their houses. And, even though the rate they are paying may be several points below current market rates, it might make sense to refinance, trading in a rate that is lower and/or fixed for one that is higher, and adjustable.

Several months ago, with interest rates dropping and some lenders bringing back the fixed-rate mortgage, many people decided to refinance simply on the basis of a lower rate. In many cases, this made sense, as long as the costs of refinancing - loan fees, appraisals, and other expenses - did not wipe out anything that might have been gained through a new mortgage.

Now, Koehler says, ''we think it (refinancing) is a viable place to pick up additional funds for future investment opportunities.'' An example of how this might work - even though the new rate is six points higher - was illustrated in a recent newsletter from his firm. In this example, over $85,000 becomes available for investment:

A home acquired 10 years ago for $100,000 with a 71/2 percent mortgage might be worth $200,000 today. When it was purchased, the buyers put 20 percent down, financing the other $80,000 with monthly payments of $559. They now owe $69,436 and in five years, the outstanding balance will be $60,341.

Now, instead of holding onto that mortgage, the owners take their $200,000 home and obtain a loan for $160,000 at 131/2 percent, raising their monthly payments to $1,833. Over the next five years, these payments, plus the larger loan balance, will leave the homeowners with refinancing costs of $129,942. This includes a tax savings of $43,380, if the homeowners are in the 50 percent tax bracket.

On the other hand, the $160,000 will provide $85,564, after the old loan balance of $69,436 and $5,000 in costs to obtain the loan are subtracted. To make all this worthwhile, that $85,654 would only have to provide an 8.7 percent taxable return over the next five years. That should not be too difficult with taxable investments, and with tax-free investments like municipal bonds or muni-bond funds, achieving this goal should be downright easy.

Even if you aren't able to invest the money and have to use it for something like college expenses, that may not be so bad, Koehler says. ''If you do use it for college, it's true that you are going to lose the investment return. But the money has to come from somewhere.''

In his own case, Koehler notes, he ended up with smaller monthly payments and still got $65,000 for investment. With his new loan, he has found one where the rate cannot increase more than 2 points in any 12-month period and it can never go up more than 6 points. So, while it always makes sense to shop around for the best mortgage, this is an especially good time for shopping.

Deducting clothing donations

Many times during the year we give out boxes of clothing in good condition to organizations like Goodwill. These are mostly clothes our children have outgrown - shoes, shirts, jeans. We have also given furniture, lamps, and bedding. How much of this is deductible on my income taxes? - E.M.O.

You can deduct the fair market value of these items from your federal income taxes. ''Fair market value'' is defined as the amount you would have received had you sold the item instead of donating it. The charity itself may be able to give you some idea of this figure, or you can check newspaper ads or garage sales to see what other people are getting for their things. When you make the donation, ask the charity for a receipt showing this figure. If you have to have the item appraised - as you might with a more expensive piece of furniture - that fee is also deductible if the item is being donated to a charitable organization.

References to investments are not an endorsement or recommendation by this newspaper.