Q. Can you tell me what the likelihood is, as a current homeowner but having filed bankruptcy in the past year (keeping my home and my car and those obligations current), that I could get a new loan to move into a condo with the same mortgage company. In other words, do you think my current mortgage company would be able to extend a loan to me? Also, will the amount of my proposed loan be affected by the bankruptcy?  Will I qualify for a smaller loan even if I may be able to make a substantial down payment? 

A. Lenders consider each loan on a case-by-case basis. Your mortgage company may be willing to loan you money for a condo, but you shouldn't expect any special consideration because you are a current customer. If you apply for a new loan, it will evaluate your credit report and credit score as if you were a new customer.  While they will reflect the fact that you've kept your mortgage and car payments up -to-date, they will reflect your bankruptcy filing, too.

You don't say how long you've had your current mortgage, or what interest rate you are currently paying. But there are two reasons a new loan will almost certainly come with a higher rate:

• Mortgage rates have steadily risen over the past two years. The average cost of a 30-year fixed-rate loan – the most popular way to finance a new house – has been just below 7% for several months now. This time last year we were paying 5.61% and in June 2003 rates had plunged all the way down to 5.28% -- the lowest since Interest.com (and its ink-on-paper predecessors) began its weekly survey of major lenders in 1985.
• Because of your bankruptcy, you probably won't qualify for any lender's best rate. So expect to pay a penalty of at least two or three percentage points. The worst case is that your credit report is so badly damaged that you'll only qualify for what's called a sub-prime loan, which charges high-risk borrowers as much as 13% or 14%.

How much you'll be able to borrow will also depend on your credit score and the appraised value of the condo you want to buy. Having a substantial down payment will help, possibly a lot, because statistics show the more you put down, the less likely you are to default.  

The bottom line: Apply to four or five lenders, not just your current mortgage company. Compare the rates and other costs to find the best deal. But don't be surprised if your new loan comes with a significantly higher interest rate.

Q. I currently own a home the mortgage rate is 5.65% the amount owed is $120,000. The home's value is $145,000 or more. The current payment is $900. I am divorced and wanted to sell the house to buy something cheaper to get my payment in the $600 range where I can afford it. Given the rise in mortgage rates the last few months would I be better off to take the house off the market for now and hope the rates go back down some time next year and then sell or just stay put? It has been on the market for eight months and although it has been shown many times I have not received any offers. 

A. Assuming that you are paying 5.65% on a 30-year fixed-rate mortgage, your current $900 monthly payment probably breaks down something like this -- $700 in principal and interest, and $200 in taxes and insurance.

To lower that payment to $600 a month – about $450 in principal and interest, and $150 in taxes and insurance -- at today’s average mortgage rate of 6.7%, you’d be able to borrow about $70,000.

Subtracting the amount you owe on your current house from the conservative value of your house, you have about $25,000 in equity. If you received that much from the sale of your house and used it on a down payment for a new home, and borrowed $70,000, you’d be able to afford a $95,000 home.

Can you buy a home you would enjoy for $95,000? In some parts of the country you could get a lovely three-bedroom house. In others you couldn’t get a decent studio condo. (You didn’t tell us where you live.) But if the answer is “yes,” then moving would still make financial sense, even though interest rates have gone up.

There’s another serious issue here, however. You can’t get rid of your $900 a month mortgage until you sell your existing house.

Since the house has been shown many times over the past eight months, you need to ask your real estate agent why you haven’t received any offers. Are you asking too much? Do you need new carpet or paint to make the interior more attractive?

A good agent should have talked to the potential buyers and their agents to find out what they’re saying about your house – and why they aren’t buying it.

Moving is moot until that problem is solved.

Have a question about your finances? Ask us at editors@interest.com.

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