DEAR BOB: About a year ago, we took out one of those 125 percent mortgages at 11.25 percent interest on our home. We used the money to pay off our credit cards and other high-interest-rate loans. The payment relief was wonderful, but now we must sell our house due to a job transfer. My husband's employer doesn't offer relocation benefits.

Our problem, as you probably have already guessed, is how to sell our house, which has a mortgage that's way above its market value. There is no way we can pay the lender approximately $40,000 more than our house is worth. We considered renting the house out, but we would then have a negative cash flow of about $400 per month. What should we do?--Bea W.

DEAR BEA: Those heavily advertised 125 percent mortgages, as you discovered, have their downside. Not only is your interest rate high, but the loan balance exceeds your home's market value.

Your obvious first choice is to confront the mortgage lender about your situation and to ask for an equitable solution. Explain that you do not want to have to file for bankruptcy protection (just the word bankruptcy makes lenders much more reasonable).

One obvious solution is for the lender to accept whatever net cash you can get from the sale of the house and then to accept an unsecured loan for the unpaid balance. This is similar to a "short sale," but the lender is not accepting the net cash as full payment.

Another solution is for the lender to "move the mortgage" to a house you will buy in the area you're moving to. Of course, you will need to add cash, from other sources, for the down payment.

Your situation is what I feared might happen when those 125 percent mortgages were introduced a year or two ago. They really are a combination of secured and unsecured loans at high interest rates, which are lower than alternative rates, such as those of credit cards.

You probably have excellent income and excellent credit; otherwise, the lender would not have approved your 125 percent mortgage. If you had stayed in your house, the problem would have solved itself as the house appreciated in market value, and the lender would have had a profitable loan. But your unanticipated move makes things difficult for you and the lender. Be reasonable. However, if the lender turns nasty, explain that you could just walk away (of course, you don't want to do that and ruin your credit).

DEAR BOB: A few weeks ago, you ran a letter from an Air Force lieutenant colonel who owns a former residence condominium that was "negatively impacted" by the closing of George Air Force base. He said his condo lost value below its mortgage balance.

Perhaps you are not aware that there is a "Homeowners Assistance Program," managed by the U.S. Army Corps of Engineers, for such situations. Not all military base closures qualify, but it is a great program for those that do. Information is available by calling 1-800-811-5532 or (916) 557-6850.--Tom Oldham, Office of the Secretary of Defense, Base Transition Office

DEAR TOM: Thank you for sharing that valuable information that will help others affected by military base closures. I have the best newspaper readers in the world; your prompt response shows why.

DEAR BOB: Three years ago, we sold our house. Our buyers built a retaining wall and then discovered an underground water-district pipe. It turned out to be an easement that was not disclosed on their title insurance report.

Our buyers are suing us because we didn't tell them about it. Frankly, we didn't know the water pipe was there (although it was on our title insurance report obtained many years earlier). Their title insurer offered to settle, but our buyers refused. We have already spent about $10,000 defending ourselves. They are suing for $50,000. What should we do?--Maria D.

DEAR MARIA: You did nothing wrong. The buyer's title insurer goofed by failing to disclose the underground water-district pipe easement that was obviously properly recorded since it appeared in your title report many years earlier.

Although this should be strictly a lawsuit between your buyers and their title insurance company, unfortunately you were dragged into it. Your attorney should make clear to the title insurer that you will subrogate any judgment against you so the title insurer will bear the entire loss. You may wish to counterclaim against the title insurer.

Situations like this--when a title insurer doesn't pay for its mistake without a court fight--are shocking. Several years ago when the American Land Title Association invited me to give the keynote speech at its annual convention, I told them to "pay for your mistakes without a court fight." Apparently, some members still haven't received the message.

DEAR BOB: My father will soon close on a commercial property sale. Can he use the sale proceeds to buy two rental houses and, therefore, defer capital gains tax? What are the tax rules?--Mrs. C.F.G.

DEAR MRS. C.F.G.: Yes, your father's situation is ideal for a Starker delayed tax-deferred exchange. He can sell his commercial property, have a third-party intermediary hold the sales proceeds beyond his constructive receipt and use that money to buy the rental houses.

To qualify for tax deferral, the total value of the rental houses must equal or exceed the sales price of his old investment or business property. In addition, he cannot receive any cash or net mortgage relief. He has 45 days after the sale closes to designate the replacement properties to the third-party intermediary and 180 days to complete the acquisitions.

DEAR BOB: I am 66 years old and need money to live on. I would like to stay in my house but don't have enough income. I am what you call "house rich and cash poor," but I don't want to sell. Your recent, brief explanation of reverse mortgages sounds wonderful. What are the drawbacks? Where can I get more information?--Rosemary G.

DEAR ROSEMARY: Since you are over 62, you are eligible for a reverse mortgage. Your house must have no mortgage, or a small one that can be paid off with reverse mortgage proceeds. You can elect a lump-sum payment (such as an amount used to pay for a new roof); or monthly, lifetime, tax-free payments; or a credit line to use when you need cash. FHA and Fannie Mae are the major nationwide reverse mortgage lenders (except in Texas).

As a possible drawback, the reverse mortgage could use up your home equity. If you live to be 120, your heirs will probably receive nothing from that equity. But there is never any personal liability. Only the equity in the house is used for repayment. Also, the upfront reverse mortgage loan fees, taken from your equity, can be significant. If you don't plan to stay in your house at least five years, don't get a reverse mortgage.

DEAR BOB: We have a 30-year mortgage, but we received a letter from our lender showing us how to pay off our mortgage in eight years and save thousands of interest dollars. Our loan will be paid off in 2002. Did we make a mistake?

--Ade F.

DEAR ADE: The faster a lender gets its money repaid, the higher the lender's true yield. If you want to own your home free and clear and have no better place to invest your money, that's fine. Every principal payment you make is an investment at your mortgage's interest rate, such as 7 percent. Many alternative investments pay better.

DEAR BOB: I am a young, inexperienced, first-time home buyer who has been reading your articles for advice. Recently, I obtained my "good faith estimate" of mortgage fees. I question the $75 "tax service fee" because I will not have private mortgage insurance. Since I will pay my property taxes directly to the tax collector, won't the tax collector notify my mortgage company if I don't pay the taxes? Also, there is a $260.80 fee for "ALTA title insurance." What's that?--Kimberly H.

DEAR KIMBERLY: It appears you are not being ripped off by your mortgage lender. Thanks for sending me your complete list of lender charges, which seem quite reasonable. The $6.25 for a credit report is especially low; many lenders inflate that to $50 or more.

The $75 "tax service fee" goes to a private company that checks to be sure you pay the property taxes since you won't have an escrow account for property taxes and insurance. Lenders need this service because the tax collector does not notify lenders if the property taxes are not paid on time.

The ALTA title insurance fee is for your mortgage lender's title insurance policy. ALTA stands for American Land Title Association, which sets the nationwide standard for lenders' title policy coverage. If the title proves defective for some reason, the ALTA title insurer will pay the mortgage balance in full.

However, ALTA title insurance benefits just the lender, not the borrower. That's why you need an owner's title insurance policy to protect you in case a title defect occurs. For example, a forged signature in the chain of title could wipe out your title. With an owner's title policy, you will be paid the policy limit, minus the amount paid to the mortgage lender under the ALTA title policy.

DEAR BOB: My wife and I have lived in our house for 24 years. Home values have obviously escalated nicely. We plan to sell and to move to a smaller house. Our profit will be about $300,000. From what I've read in your column, we qualify for that new $500,000 home-sale tax exemption ($250,000 each). However, if one of us dies before we sell, can the survivor still get the $500,000 exemption?--Robert L.

DEAR ROBERT: If the qualifying principal residence is sold in the year of a spouse's death, the full $500,000 is available. After that, the exemption for the surviving spouse drops to $250,000.

However, this is not a problem for most surviving spouses because you (or your widow) will presumably inherit the deceased spouse's half of the house. This is free of estate tax under the marital exemption. More important, the surviving spouse gets a new stepped-up basis as of the date of the spouse's death.

In the situation you describe, this will reduce the surviving spouse's home-sale profit from $300,000 to $150,000 because of the stepped-up basis. Your letter is from California, a community property state, so if you hold title as community property or joint tenancy with right of survivorship, the surviving spouse will probably get a new stepped-up basis on the home's entire market value. Your tax adviser has details.

DEAR BOB: Since 1972, I have owned several rental houses. If I sell them, the capital gain taxes will be huge. Recently you wrote about periodic, tax-free refinancing to take out cash for more investments. If I don't sell, my adult children will inherit these houses. What should I do?

--Lilburn N.

DEAR LILBURN: Death is the ultimate tax shelter. If you die owning those houses, Uncle Sam will never get any capital gain tax from you (but their net value will be included in your estate). Periodic refinancing to take out tax-free cash is a great way to enjoy your equity without paying profit taxes. Consult your tax adviser for details.

Readers with questions should write Robert J. Bruss at P.O. Box 280038, San Francisco, Calif. 94128.{copy} 1999, Tribune Media Services Inc.