Q: My daughter has a $500,000 interest-only loan with a term of 40 years. After 10 years, the loan converts into a principal-and-interest loan and she will start paying down the balance. Her loan is 6.25 percent and the interest rate is fixed.

Of course, her house is now worth a lot less than $500,000. Maybe it's worth $350,000. So, what is she supposed to do? She has morals and pays the $3,000 mortgage every month, but is it really fair?

Why can't something be done for her and not just for those homeowners who are not making their payments and are being foreclosed on?

She is a good person and deserves better. She has been told that the only way she can refinance is to come up with 20 percent to put down. Is this true?

A: It's very unfortunate that your daughter bought a $500,000 house with an interest-only loan (and I'm guessing nothing down). I understand that her property seems to be worth a lot less right now, but that doesn't mean the property won't be worth what she paid for it down the road. I assume she didn't buy it for a quick fix-and-flip but to live there for the long run.

You have to take the long view when it comes to real estate, as it is a rather illiquid investment (meaning, that it isn't as easy to sell as a share of stock in a company).

If your daughter lives in the property for the next seven to 10 years, it will likely be worth more than what she paid for it. After property prices fell dramatically in Southern California in the late 1980s, property values were fully restored by 1994, and then prices rose dramatically in value from there. If your daughter keeps making her payments and maintains the property, the value should return to the area over time.

Regarding the issue of fairness, if your daughter has enough income to qualify, and the property appraises out in value, she can get a new loan through the federal government, which is making FHA loans in high-cost areas up to $729,500. If she doesn't have the income to qualify and if the property has really dropped so dramatically in price, then she may be out of luck -- at least for now. There are virtually no lenders willing to do jumbo loans at the moment (loans over $417,000).

I'm not sure why you feel your daughter deserves a bailout. Your daughter is the one who chose this property and this loan. Surely no one held a gun to her head and made her sign on the dotted line. Like millions of other Americans who now find themselves in trouble, she thought she was making a smart move for herself and her family. She thought she was investing in her future. But by not really understanding the numbers, she finds herself in possible financial trouble.

My suggestion is that if she has the income to support her monthly mortgage payments, she should do that. She will continue to maintain her credit rating (which is hugely important these days) and with luck, one day she will own a property that is worth what she paid. If not, she should hire an attorney and consider her options.

If she has financial problems, she might consider bankruptcy, or she might list the home for sale as a short sale or work with the lender to take the property back in lieu of foreclosure. But these options are usually left for those people that are unable to pay their bills, have severe financial problems and they will inflict a damaging blow to their credit score.

Q: My father passed away six months ago. My mom is 87 and we had to put her in a nursing home, as she has Alzheimer's. I have power of attorney for her estate and we sold her home. Does she have to pay taxes on that sale?

A: It depends on what her profit was at the time of sale. Your mom can keep up to $500,000 in profits tax-free because her husband died within the past two years. (In past years she might have been limited if the sale of the home occurred in a year other than when her spouse died. But this rule was changed last year.)

If the profit on the sale of her property is more than $500,000, then she will have to pay long-term capital gains taxes. Because the issue of death and taxes can get quite complicated, if the profit on the sale of the home exceeds $500,000, you should talk to your accountant, estate attorney, or tax preparer for more details.

Q: I am five years into a 30-year fixed-rate mortgage at 5.75 percent. We had planned to stay in the house for two to three years, although with the real estate market in such bad shape right now, we may end up staying in the house for a longer period.

I can refinance my mortgage at 4.875 percent with no points, but I'll have to pay $3,500 to $4,500 in closing costs. I would save about $180 per month but the closing costs would be added onto the mortgage balance, so I'd be paying interest on that money for 30 years.

We're having a hard time justifying going back to a 30-year loan when we've paid down five years already. Is this a good idea or not?

A: First, you should have your lender amortize your loan based on a 25-year payout so you can compare the loans on an apples-to-apples basis. You should see if your monthly payment on the new loan is less than your existing loan.

But the key to making the right decision is analyzing how long it will take you to repay the costs of the refinancing. If you were to pay the refinance costs upfront, you could then compute the number of months it would take you to break even. If the number of months to break even is more than a year or two, the costs to refinance may be too high to justify moving forward.

Getting a 30-year rate at 4.875 percent sounds like a great move. But if you save $180 per month, it will take nearly 20 months to pay back $3,500 in closing costs. That doesn't sound like a great deal to me. You should be able to pay off your loan costs in well under a year.

If you roll your refinancing costs into the loan balance, you'll be paying off those loan costs for the life of the loan. If you're not going to either shorten your loan from 25 years to 15 or 20 years, and your monthly payment isn't dropping if the loan has a 25-year amortization schedule, then there is no point in going through a refinance.

For many people who have loans in the 5 percent range, it may be tough to justify refinancing at this point. One problem is that homeowners are fixated on the interest rate they're paying rather than how much cash they're spending.

I'm all about how much cash is leaving your pocket at the end of the month. If you start to look at it this way, I think your next step will become increasingly clear.

As a side note: Mortgage lenders everywhere are raising the costs to get a loan -- precisely at the time when you'd want those costs to go down. Instead, you can expect to be quoted higher origination costs, higher points (a point is 1 percent of the loan amount) and more fees.

The good news is that these costs are negotiable. That's why you have to shop around with more than one lender. You should talk to three or four lenders, including a mortgage broker, a lender at a national bank, a credit union (if you belong to one or can join one) and a smaller local bank. By comparing costs from each of these lenders on an apples-to-apples basis, you'll quickly learn how much you should be paying and will be able to negotiate more intelligently with lenders to get the best deal.

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