Then you have 45 days to designate a rental property of equal or greater cost and equity to be acquired within 180 days after the sale of your rental condominium. Although the acquired property must be rented to tenants, you can later convert it into your personal residence, if you so desire. For further details, please consult a real estate or tax attorney.

Q: My family is about to buy our first home and we are shopping for a mortgage. Our ratio of household income to mortgage payments exceeds 28 percent and 36 percent for all debt. We need a mortgage of about $160,000. I hope to find an FHA-insured mortgage. Also, I understand there are secondary mortgage companies. Please tell us the differences between FHA, conventional and Fannie Mae loans.

A: If you need a $160,000 mortgage, forget about FHA because FHA maximums are far lower for your area. But a conventional mortgage from a local bank, S&L or mortgage broker would be ideal. Since your monthly mortgage payment will exceed 28 percent of your gross family income, you don't meet the tough Fannie Mae-Freddie Mac guidelines (although waivers are allowed if you have a good credit history).

In your situation, I suggest you consider an adjustable rate mortgage. Normally, I don't like ARMs, but with an above-average ratio you will find lenders most receptive to your ARM application. By prequalifying for a loan, you can shop with confidence for a home, knowing you can get the mortgage you need.

Q: Please explain how extra monthly principal payments work to save interest on an amortized mortgage.

A: When you obtained your home loan, the lender probably gave you a loan amortization schedule. It showed in the early years of your loan most of your monthly payments go to pay the interest and only a small part reduces the principal balance. But as the years go by the interest portion of each payment decreases and the principal balance reduces faster each month.

If you make an extra principal payment each month, such as $100, the interest for each future monthly payment will drop more than is indicated in your amortization schedule. In other words, that amortization schedule only applies if you make the regular minimum payment each month. When you add an extra principal payment each month you cut down the life of the mortgage. If you keep doing this every month, perhaps reducing your 30-year mortgage to 20 years or less, you will save thousands of interest dollars. (Copyright 1992, Tribune Media Services Inc.)

Bob Bruss' column appears Sundays in the Home/Real Estate section of The Times. Letters and comments should be sent to Bob Bruss, Seattle Times Newsroom, P.O. Box 70, Seattle, WA 98111.