DEAR BOB: Congratulations on your sound advice to that reader who wrote you a few weeks ago advising not to pay off the home loan early. We made that mistake about a year ago. I came into an inheritance and wasted it paying down our home mortgage by $65,000. That turned out to be a very dumb decision, because a few weeks later the company where I had worked for more than 12 years announced that it was closing. Since then, I haven't been able to find a job paying near what I was earning. The mortgage company won't talk to us about refinancing since I am only temporarily employed. My wife can't work because she has to take care of our three small children. My chances of finding a high-paying job are not great, and we are three months behind on our mortgage payments, which the lender refuses to reduce. Do you see any solution other than to sell our home and become renters? -- David F. DEAR DAVID: Yes. Thank you for writing. Your story will convince more people than I can that paying down a mortgage or paying it off early usually is not a smart thing to do. If you had not used that $65,000 inheritance to pay down your mortgage, you could now use the interest income to supplement your decreased income and keep up your mortgage payments.

Every week I get letters, especially from retirees, who ask if they should pay off or pay down their mortgage. On paper it looks smart to do so. But in the real world, it's usually best not to do so. The better alternative is to conserve cash for emergencies and investments, as you now know you should have done with your inheritance.

Before you decide to sell, you should know that there are mortgage lenders, known as "equity lenders," who will make loans to homeowners who have bad credit or unstable employment. They look primarily at the property, rather than the borrower, as security for the loan. These loans are usually called "no qualifiers." But some of these lenders charge high interest and loan fees, so shop among every lender in the Yellow Pages under "real estate loans" so you don't get ripped off.

But selling would allow you to take out all the equity from your home. Perhaps you might then move to an area where you can find higher-paying employment. I realize it's hard to think straight when you are three months behind on the mortgage payments, but consider all the alternatives.

Still another choice is to ask the lender to restructure your existing mortgage to reduce its monthly payments, since you substantially reduced the principal balance. Not all lenders will do this, but it won't hurt to ask. DEAR BOB: We are first-time buyers who have been searching for a home about two months. Several real estate agents we met at weekend open houses have tried to find us a home but their listings seem so overpriced. Every week we get a brochure at our home from a company called "Help-U-Sell," which advertises homes for sale by owners. Do you think we can save by buying direct from an owner without a real estate agent? -- Bettye H. DEAR BETTYE: No. Help-U-Sell is a fine franchise company, but the market value of a home is the same whether a real estate agent sells it or not. If you buy direct from an owner without a real estate agent, then you and the seller will probably have to do much of the work an agent normally handles such as arranging a mortgage, handling inspections, complying with local transfer laws, obtaining a title search and making arrangements for the closing settlement. In other words, the buyer and seller earn the real estate sales commission they think is being saved.

But I agree with you that many real estate listings are overpriced. Most homes sell for 5 percent to 10 percent below the asking price. Before making a purchase offer bid, insist that the agent show you a list of recent nearby home sales. Although some houses sell for full asking prices, you will be amazed at the difference between asking prices and actual home sales prices. DEAR BOB: About two years ago we moved out of our former residence and rented it to four college students. They pay us the rent on time each month but, I understand they are not taking care of the property very well. The holder of the second mortgage has written to us threatening to foreclose for "waste" if we don't clean up the property. As we now live about 450 miles away, we are not in a position to spend money on the house. Can the mortgage holder really foreclose on us for not maintaining the house? -- Shirley R. DEAR SHIRLEY: Yes. But a mortgage foreclosure for "waste," which means failure to maintain the premises, is extremely rare. Since you are making your mortgage payments on time, the lender would have a very difficult time foreclosing, since proving waste is highly subjective. However, it is in your best interests to maintain the property, so I suggest you get your property repaired as quickly as possible. Ask a real estate attorney to explain further. DEAR BOB: Some time ago, you advised another seller not to sell her commercial building on an installment sale because the buyer's down payment might not be enough to pay the profit tax. Does the same advice apply to the sale of my home where I will be using the "over 55 rule" $125,000 tax exemption? -- Wally R. DEAR WALLY: No. The 1986 Tax Reform Act made real estate installment sales very undesirable for many sellers because the tax due in the year of sale might exceed the buyer's down payment.

However, the old rule of taxing profits as the buyer's payments are received by the seller still applies to real estate installment sales (1) below $150,000, (2) of "personal use" property such as your home, and (3) of operating farms. If you want to carry back a first or second mortgage and your home sale profit exceeds $125,000, an installment sale might be highly advisable. Consult your tax adviser for further details. DEAR BOB: I fear we have gotten ourselves in a tax mess regarding the sale of our homes. We sold our first home in November 1980. The next month we bought a slightly more expensive replacement, thereby deferring the profit tax on our sale profit. Then in December 1982, we sold our second home and again deferred our profit tax by buying a more costly home in January 1983. We sold this third home in September 1985 and lived with relatives until seven months ago when we lease-optioned a home where we are now living. We remodeled this house and were planning on exercising our purchase option by September 1987, so we can defer the profit tax on our 1985 home sale. However, the seller cannot deliver us marketable title, since she has a $225,000 federal income tax lien that we just discovered is recorded against the house. We called the IRS and were told we can't get any hardship extension of the two-year replacement period. Any ideas? -- Julie R. DEAR JULIE: Your situation illustrates why lease-option home buyers should obtain a title insurance binder policy at the time of entering into the lease-option agreement. Obviously, you have legal recourse against the seller for being unable to deliver marketable title, but I don't think a judgment against a person with a $225,000 federal income tax lien that she can't pay will be worth much.

The information you received from the IRS about the lack of time extensions for the rollover residence replacement rule (IRC 1034) is correct. As you know, this tax break allows profit tax deferral on the sale of a principal residence when a replacement home of equal or greater value is bought within 24 months before or after the sale. The only ways to get a time deferral for buying the replacement home require entering military service or working overseas.

Your best bet is to get busy real fast to quickly buy and occupy another replacement home to meet your September two-year replacement home deadline. There just isn't any other viable alternative. Consult your tax adviser for full details.

P.S. The same tough no-time-extension rule also applies to other home replacement situations, such as if a new home's construction is incomplete by the deadline or the seller backs out of the sale.

DEAR BOB: Several weeks ago, you remarked about the shortage of reasonably priced home listings. As a real estate agent, I think the reason is people aren't moving unless they must because of job transfers, divorces, deaths, etc. Instead, I find they are remodeling their present homes, because that is usually cheaper than buying a new home that meets their requirements. Also, there is much economic uncertainty, which causes people to stay where they are. I think this explains why it's so hard to find homes for sale in the "bread and butter" working class price ranges. -- Zola R. DEAR ZOLA: I fully agree. In my area, I've never seen so much remodeling and construction of room additions to existing homes. This tells me that most people like where they live but want more space and find it is cheaper to finance additions and improvements than to buy another home.

DEAR BOB: I've been reading a book about the 1986 Tax Reform Act, trying to find some loopholes. But they all seem to have been plugged by Congress. My question is about the tax deferral when a homeowner sells a home and buys another. Is there any limit to the maximum amount of profit that can be tax deferred? -- Tom R.

DEAR TOM: No. IRC 1034 requires tax deferral when a principal residence is sold and a replacement of equal or greater cost is bought and occupied within two years before or after the sale. That simple rule is worth thousands of tax dollar savings. It is one of the few remaining tax loopholes and I doubt it will be plugged. Ask your tax adviser to explain further.

DEAR BOB: In 1985 we sold our home and used that "over 55 rule" $125,000 tax exemption you often discuss. However, we changed our plans and in January 1987 bought a condo that cost us more than the sales price of our old home. Is there any way we can revoke our use of the $125,000 tax exemption, since it only saved us from paying tax on about $55,000 of profit? -- Vickie R.

DEAR VICKIE: Yes. Use of the $125,000 home sale tax exemption can be revoked within the three-year statute of limitations period for amending your tax return. You'll need to file IRS Form 1040X along with an amended IRS Form 2119 showing your use of the "rollover residence replacement rule" tax deferral and revocation of your $125,000 home sale tax exemption. Your tax adviser can assist you with these forms.

DEAR BOB: My husband and I work together in a dental office. He is a dentist and I am a hygienist. Our idea is to buy a building where we can have our office in the front with a spacious home either upstairs or at the rear. We have looked at several existing buildings where the zoning allows such a setup, but they all would require extensive remodeling to meet our requirements. Then last week we found a vacant lot where we could construct a building just as we want it. Would you advise us to build or buy an existing building? -- Charlene H.

DEAR CHARLENE: The risks of new construction are often much greater and often more expensive than the costs of remodeling an existing building. With new construction, you may run into unexpected costs such as for soil or foundation problems. But remodeling an existing building usually has few surprises if you and the architect plan things well.

Renovating an existing structure offers excellent profit opportunities to increase the market value by more than the construction cost. If you can increase the market value of an existing building by at least $2 for every $1 you spend on renovation, then you'll have a profitable investment as well as a desirable business and home location.

To summarize, if you can, find a suitable existing building to remodel to meet your requirements. I recommend that instead of starting from scratch. Consult with an architect and contractor for further suggestions.

DEAR BOB: When we obtained our mortgage to buy a home, the lender insisted we write a separate check payable to the lender for the loan fee. When I explained we didn't have an extra $2,400 in our checking account, the lender assured us our check wouldn't be cashed until after our new mortgage was funded. The loan officer said this was being done upon the advice of their lawyer because if we don't write a separate check our loan fee won't be tax deductible as interest. This sounded crazy to us, but we went along because we couldn't see anything to lose. Why is the lender doing this? -- Raoul R.

DEAR RAOUL: Your wise lender is looking out for your best interests. In several Tax Court decisions, home loan borrowers have been barred from deducting their loan fees as itemized interest unless they wrote a separate check to the lender for the loan fee. Many lenders do a disservice to their home buyers by subtracting the loan fee from the loan proceeds. Your lender handled things correctly and you should be grateful.

However, only loan fees paid to obtain a home loan to buy or improve your principal residence qualify as itemized interest deductions. All other loan fees must be amortized (deducted) over the life of the mortgage. Ask your tax adviser to explain further.

DEAR BOB: We expect to sell our home in a few months and are trying to plan a tax strategy. Our tax adviser suggested we make a cash sale and buy our new home for as small a down payment as possible. She says we then can pocket the tax-free cash from the sale to spend as we please. I am thinking of using my VA loan entitlement to buy our new house so we have to pay virtually nothing down. But my wife thinks we should make a large cash down payment to minimize our monthly mortgage payments. What do you think is best? -- Albert H.

DEAR ALBERT: Your tax adviser has given you excellent tax information as well as very practical advice. I always suggest that home buyers obtain the maximum mortgage available and pay the minimum cash down payment. This policy conserves cash for emergencies.

Your wife's idea to make a big down payment and minimize the monthly mortgage payments is fine if you never need any cash. But most families need cash sooner or later. It's a wonderful feeling to have cash available, such as in a money market fund, mutual fund or other readily liquid investment. If you need cash quickly, it's often hard to borrow on your home equity, especially if you are sick or unemployed.

DEAR BOB: We are retired and have almost $100,000 on deposit with a major S&L. At present we own our home free and clear but want to borrow $50,000 to pay for some necessary home renovation and to take a cruise around the world. We have figured very carefully that our fixed monthly income will be more than adequate to make the mortgage payments and leave plenty left over. After much discussion, we decided it would be better to borrow than to deplete our savings by $50,000. But the S&L turned us down. We even offered to pledge $50,000 of our account as security. The loan officer said we don't meet Fannie Mae-Freddie Mac loan guidelines since the monthly loan payments would take about 40 percent of our income. Isn't this pretty stupid? -- Karl H.

DEAR KARL: Yes, it is stupid. But before you withdraw your $100,000 from that nasty S&L, insist on talking to their vice president for loans. Apparently that S&L sells all its new loans in the secondary mortgage market and follows inflexible loan rules.

Shop among at least two other S&Ls, two banks and two mortgage brokers to find a lender willing to make the loan you want. There are many flexible portfolio lenders, but stay away from the lenders who only sell their loans in the inflexible secondary mortgage market.

Readers with questions should write Bruss directly at P.O. Box 6710, San Francisco, Calif., 94101.