A few months ago, Lou Stanasolovich, CFP, had a client who needed a $325,000 mortgage to buy a $400,000 house. "The problem was that he would have had to take out a jumbo loan, which usually carries a higher interest rate than a smaller mortgage," says Stanasolovich, president of Legend Financial Advisors in Pittsburgh. "So instead of paying an extra 0.25% to 0.5%, I suggested that he borrow the $300,700 maximum allowed for a traditional mortgage and use a home equity loan for the remaining balance."

Such a move is not something a banker would normally suggest, or that most people would think of. But it's the kind of advice that can win valuable points with clients at a time when financial advisors are searching for ways to add value to their practices and expand their services beyond plain-vanilla investment management. With interest rates near historic lows, it also can open the door to thousands of dollars in savings.

Offering advice about mortgages on an informal basis when someone is buying a home or considering refinancing is nothing new. Advisors like Stanasolovich say, however, that the added step of taking an active role in paring mortgage debt and offering creative solutions helps maintain client loyalty. "If we can save someone $3,000 or $4,000 a year in interest, we turn the cost of our advice into a benefit," he says. In some cases, he says, his firm's flat fee is completely covered by the savings made possible by a change in mortgage debt structure.

The rewards also can be tangible. Advisors who use fee structures based on assets under management or sales can benefit when savings from lower mortgage costs are channeled into investment portfolios. And high-net-worth individuals, who often don't have the time or inclination to shop rates, can make glaring mortgage mistakes that don't take a lot of sleuthing to uncover. "We just signed on someone this week who had a 7.7 % mortgage," says Catherina Pareto, a financial advisor with Investor Solutions, Miami. "He told us that even though he'd heard mortgage rates were lower than that, he was just too busy to look into refinancing. When we made it clear how much he could save with a lower rate, he finally got motivated to get moving."

Financial advisors also are finding ways to make the most of appreciation in home values by maximizing home equity lines of credit. Suggesting a home equity line can keep investment assets from flying out the door when a client is considering liquidating securities to raise cash or needs the added assurance of a readily accessible source of liquidity. "We often look at a home equity line of credit when people have excess cash sitting on the sidelines that could be invested," says Wil Heupel, CFP, ChFC, CLU, of Accredited Investors in Minneapolis. "The home equity line serves as a good substitute for cash for liquidity needs." Heupel says his firm reviews the terms and conditions of client debt, including mortgages, on an annual basis.

Pay Down Or Invest?

A common question from Heupel's clients who come into excess cash from salary increases, inheritances, bonuses or other sources, is whether they should use the money to reduce or pay off their mortgages or invest in the stock market. During the bull market, the traditional argument that long-term stock market returns would far exceed the interest savings from reducing or eliminating a mortgage sounded pretty convincing. These days, such reasoning may not be accepted as readily as it once was.

"Many people are black and blue from the market slide, and they're nervous about committing more money to stocks even if it makes sense over the long term for them to do so," says Heupel. "It's a lot harder to turn down the certainty of saving thousands of dollars in interest costs in favor of potentially higher, but more speculative, stock market returns.

Using even relatively modest return assumptions, staying in the stock market still may make a lot of sense. After the federal mortgage interest deduction, the true cost of a 7% mortgage is 4.9% for someone in the 30% tax bracket. The key issue is whether or not a client feels confident that he can earn more than that after taxes from an investment portfolio.

To help clients weigh their options, Heupel does a spreadsheet comparing what they could potentially earn in the stock market against interest savings from paying down a mortgage. But even after a well-constructed illustration that favors investing, he says, a skittish client may still favor the pay-down option. "In many cases," he says, "the decision to pay down a mortgage is an emotionally driven one."

For some people, paying down can make sense-for example, very conservative clients whose investment returns are likely to be lower than more aggressive ones, or people with older mortgages whose payments consist mainly of principal. (The latter group's mortgage costs are higher on an after-tax basis because they do no reap the full benefit of the deduction for mortgage interest.)

That deduction effectively cuts the cost of the loan; and the greater the deduction, the bigger the benefit. Those in high tax brackets whose monthly mortgage payments consist mainly of interest get the greatest deduction. The after-tax rate on a mortgage loan with a 7% interest rate, for example, would be 5.1% for someone in the 27% federal tax bracket, but only 4.5% for someone in the 36% tax bracket.

And then there's the important sleep-at-night factor. "The bottom line is, if a risk-averse client has peace of mind by knowing he owns a home free and clear, then we'll work in that direction," says Pareto, whose Florida practice handles a large number of retirees.

Fixed Versus Adjustable

In today's low interest-rate environment, most mortgage strategies will probably involve fixed-rate mortgages, with adjustable-rate mortgages taking a back seat as more of a niche product suitable for limited circumstances. While their initial rates are lower than fixed mortgages, most people don't like the uncertainty that comes with the rate adjustments after the initial lock-in period.

Greg McBride, an analyst with Bankrate.com, says adjustable-rate mortgages can be useful in certain situations. Borrowers moving into starter homes that they plan to live in only a few years might use a hybrid ARM that has a fixed rate for an initial number of years before it fluctuates. The shorter the fixed period, the lower the initial interest rate. Others who might choose a hybrid ARM include transient executives who want to build some equity in a home rather than rent, or professionals such as physicians with growing practices who can expect a sharp increase in pay within a few years.

Despite today's unusually low rates, Heupel says, his firm rarely recommends fixed-rate mortgages, even for those who say they plan to stay in their homes for a long time. Instead, he prefers hybrid ARMs with rates that are initially fixed for five or seven years. "When we get toward the end of the fixed period, we look at refinancing with a low- or no-cost five- or seven-year ARM," he says. "In effect, we're actively rolling from one mortgage program to another." Although ARMs with shorter fixed-rate terms are available, Heupel cautions against using them because their rates are too unpredictable and they typically require borrowers to pay closing costs.

Active debt-management strategies like Heupel's require advisors to keep a constant eye on interest rate trends. INVESCO economist and portfolio manager Fritz Meyer says he "can easily see mortgage rates at the end of the year around where they are now." Factors keeping rates in check include low inflation and low yields on 10-year Treasury notes, which strongly influence mortgage rates. With the stock market down, investors are pouring money into Treasury notes. Their popularity should help keep their yields, and the mortgage rates that track them, low.

On the other hand, an interest rate hike by the Federal Reserve, a stock market rally or a higher-than-expected inflation report could prompt rates to trend upward. Keith Gumblinger, vice president of HSH Associates, a firm that follows mortgage rates and trends, believes that fixed-rate mortgages will tick up to 7% by year-end. "Rates are probably as low now as they will realistically get," he says. "If I were considering refinancing a home or locking in a fixed rate, I would do it now rather than wait until later in the year."

Regardless of where rates may be headed, financial advisors can do a number of things to begin taking a more active mortgage advisory role:

Forge relationships with local bankers. "I had one local bank call me towards the end of the month and ask if any of my clients would be interested in a special promotion for a home equity line of credit at a rate of prime less 0.5%, with no closing costs," says Heupel. "I sent about 10 qualified clients his way. The banks like to deal with us because they know our clients are good credit risks."

Make the most of Internet resources. A good source of information on mortgage rates and trends can be found at HSH Associates' site, hsh.com, and Bankrate.com has useful articles and calculators.

Look at programs offered by brokerage firms. Banks are no longer the only place to find mortgages. Some brokerage firms, such as TD Waterhouse, are turning up the heat on banks and offering competitive home equity and mortgage programs with dedicated help desks for advisors.