Free Financial Advice

Financial Questions from Our Visitors - Page 11

The examples below are from some of the visitors to Free Financial Advice. The questions below mostly represent word for word the questions asked by the visitors (sometimes including bad punctuation and spelling), but occasionally the questions will be edited on this page. And even though these people have shared their personal finances with Free Financial Advice, we have stripped out any names or other personal information to protect their identity. If you see one of your questions on this page and it makes you uncomfortable, please contact us and we will remove it immediately. Also, please note that any advice or suggestions made from this site are only suggestions and should not be deemed as professional, legal advice. Please see our disclaimer for more information. I apologize for continually mentioning our disclaimer, but this is a very litigious world that we live in.

Question:

I have a question about finances after divorce. I'm in the process of going through a divorce. The court has granted me temporary support of $1340 per month, plus my husband has to continue to pay the mortgage ($1360). Our joint income was $110,000 annually. I've always worked part-time so I could be at home with the children. My annual income is $20,000. I know that I won't be able to afford the house we are currently living in, but I'm worry that I won't be able to qualify for a home loan with only my income. We have two children under the age of 18 and attend private schools, which I want to continue. I'm currently paying off credit card debit as fast as I can. Any advice on rather to stay in current home and refinance it, but another 30 year loan means that I will be 70 years old before it's paid off. I hadn't planned work for that long. Any suggestions would be greatly appreciated.

Response:

Sorry to hear your news. Unfortunately I don't have a lot of advice for you, other than to consider moving into a less expensive home if you cannot afford your current mortgage. Regarding getting financing, you will be able to use any child support or alimony as income when you apply for a loan. And by law, it is illegal for any lender to discriminate against you based on the source of your income. This means, that assuming you can afford the house with the support payments, it shouldn't be any harder to finance than if you were earning the support money yourself.

Question:

Help!! I don't know who to ask so am seeking your help. I have been unable to work for 3 years (in fact, had to work part time even before that) because I had to take care of my terminally ill husband. Needless to say, without working, money set aside was used and my credit cards are up and I want to pay them off. Now, what is the best way to do that? Dissolve my "small" IRA and sell some stocks, take out a home loan, line of credit, refinance (my rate is 5.875). Please advise me. This is driving me batty. Thank you.

Response:

The right choice for you depends on many factors (of which I don't know most), but one of the most important factors is what your estimated future income looks like. If you are only paying off your credit cards by taking on more debt than you will be able to pay off with your future income, then it doesn't make any sense at all. If that's the case, you'd rather keep the credit card debt because it is not secured by your home and would not affect you adversely (except for your credit) if you defaulted on it.

If, on the other hand, you are expecting to return to a profitable budget sometime in the future and only need to finance the credit card debt until then, there are many options that would work equally well. The best choices would be to get a home equity line or line of credit on your home. Rates are very low right now and the interest is deductible on your taxes. If you do this, it probably makes sense to sell some of your stock (not your IRA though) each month or quarter to make the payments on this debt. That will insure that you don't go into credit card debt again.

However, I must say that this is only a temporary solution. In the longer term, you'll have to find a way to either live within your current means or to increase your income.

Question:

My husband is 54 1/2 and i am 53 we are currently in our 4th year of a 30 year mortgage with am arm of 11 % that will adjust to 11 1/2 in june we also have a 401 k account in a minimal risk profile , with enough in it to pay off our mortgage. one of my husband's big worries is having a high price mortgage to pay for on retirement income. We have an opportunity to refinance our mortgage for 15 years at 5.75 Would we be better off financially to refinance or pull the money from the 401 k and pay off the mortgage We would then invest what we currently pay for house ($600) and what we put into 401k ($400) into a mutual fund at 7% interest paid to us over the 10 year period until my husband is retirement age We realize that we would lose a tax deduction but would the money saved in interest and the new investment interest override the loss?

Response:

It looks to me like the best plan is to refinance the mortgage and invest the savings into mutual funds. Here's why I believe this:

- By refinancing the mortgage you will drop your interest rate from 11.5% to half that rate. This should drop your mortgage payment from $600 to $300-400. You can then invest this money in your 401K or into mutual funds.
- If you took the money from your 401K you would not only have to pay a 10% penalty on the withdrawal (I think you can only avoid the 10% penalty if you are buying a new house, not paying it off), but you would also have to pay regular income taxes on the total amount. This would likely put you into a higher tax bracket for the year and would make the after-tax
portion of the 401K worth much less.
- By paying off the mortgage with your 401K you would also lose all of the beneficial tax benefits of carrying the mortgage. Similarily, you would also lose the tax-free compounding effect of your 401K.
- Finally, your investments in your 401K and mutual funds should return a higher percentage than the after-tax mortgage rate that you will be paying. This alone is reason to keep your investments rather than pay off your mortgage. Combined with the other points listed above, it seems like a no brainer to keep your 401K and refinance the existing loan.

Question:

My husband has a government school loan that has jumped from an initial balance of $30K to $72K. The original balance compounded to a balance of $45K before the loan was consolidated with US Dept of Education in May 2000. This is when the balance jumped to $68K. The account has been kept in deferment or Forbearance to keep the monthly payment affordable($100/month), however, the monthly interest is still building, currently almost $500/month. The amount of interest is is added to the principle. The current bal. is $72K. We need HELP. How can we reverse this? We can now pay more each month, but to keep up the the interest we would put ourselves in severe financial straights. We've heard that there is a way of reversing the the consolidation in order to get back to the original balance of $45K.  I would much rather make higher payments on a $45K balance than to have to pay on a loan that will keep us in debt for the next 20 or so years. Thanks for this great website.

Response:

I'm not an expert on government funded school loans, so I don't know if there is a legal way to reverse the consolidation that you've heard of. Try checking with the person that gave you that idea to see what they are talking about. If that doesn't work then contact the government office that holds the loan and ask them what your options are.  If those approaches don't work, you may be able to work with a legal company to help reduce your debt. These companies would basically call the lender and negotiate a better interest rate or a reduced principal balance for you, but depending on how it is done it could harm your credit.

The real thing to look at is whether or not you are going to be able to pay off this loan. If you are going to continue accruing interest faster than you can pay it off then you need to do something about it. The four solutions I can think of are (in the best order): 1 - find a way to reduce your interest rate so that the interest is manageable, 2 - find a way to make more money to pay the debt faster, 3 - renegotiate the debt to lower your payment, 4 - declare bankruptcy (which lowers or eliminates the debt but severely harms your credit for 7-10 years).

Question:

My husband wants to refinance the house again (!) in order to consolidate credit card debt. The bank has offered us a loan of 1% (6 something %) less than we currently have. No fees or points. There are two options actually: refinance and roll in the credit card debt or just get a low interest loan to consolidate the credit card debt, of about 10,000. I'm in favor of the latter. We are 63 and 64 years old, with no assets except the house (Isn't that sick!) on which we carry a balance of 102,000. Oh....and we also have a home equity loan of 22,000. Our income is about 40,000 gross. I know, we sound stupid.

Response:

Sorry it's taken me so long to get back to you, I just haven't had the time to answer all the questions I receive.

Anyway, if you haven't acted on the refinance yet, here's my advice: It makes sense to refinance if you can really reduce your interest rate by 1% and not pay any points or fees. Regarding whether or not you want to roll in the credit card debt, there are pros and cons. The pros are that the interest will become tax deductible, your payments will be lower, and your overall interest rate will decrease. The cons are that the credit card debt will now be secured by your house and you will have less equity in your house (in case you need to take out money at some time in your future). Also, having some credit card debt is a good reminder for some people. Once it is refinanced, it is easy for people to fall back into the credit card trap, so if you pay off your credit card debt with a refinance, make sure you cut up your credit cards or only save them for emergencies.

Question:

Yes, I would like some advice about a company who you pay monthly a fee and in 3 years you are debt free of 20K. They negotiate with creditors. have you ever heard of this and is it a good thing do you think?

Response:

This could or could not be a good deal, but it sounds like a scam to me.  If they are going to negotiate your debt then you shouldn't pay a monthly fee, but rather take on the responsibility of the after-negotiation payments. It sounds to me like they are asking you to pay a fixed amount regardless of how well they negotiate. This gives them ample incentive to get rid of as much of your debt as possible, but it also gives them
incentive to charge you more than the value it is worth to you.

My advice, I would not recommend this unless you can get a guaranteed of a minimum debt payment that is much lower than your current payment.  And at $20k, the minimum debt payment for 3 years at 8% is $626. Also, be careful of the risk to your credit.

Question:

Please answer this question for me. My husband passed away Nov. 21st 2002, he left me with a huge amount of credit card debt. I need to know how to pay these bills, would it be better to take the money from the 401k acct or try to get a loan? I was told that if I take the money from the 401k acct. I will have to pay a lot of taxes, i am not able to work and I am 65yrs. old.

Response:

If the credit card bills are not under your name, then I don't believe that you are responsible for them.

However, if you are responsible for the credit card bills and want to pay them with your 401K, you should be able to take out money from your 401K without paying a tax penalty (because you are over 59 1/2), however, you will have to pay normal income taxes on the amount you withdraw. Therefore, if this is how you want to proceed, then you may want to pay only a portion of the debt off this year and defer some of it until next
year (if it would keep you in a lower tax bracket for both years than paying it all at once). The money withdrawn will show up on your taxes as ordinary income, so if you don't have much income now the taxes shouldn't be too high.

If I were you, I'd really investigate whether or not you are responsible for the debt in the first place. If your name is not associated with the credit cards, then there is little the credit card companies can do to recover the money. And even if you they tell you that you are responsible and you can't afford to pay it, the worst that they can do is tarnish your credit, which I assume would probably not dramatically affect your life given that at this stage in your life you probably won't need to borrow
much more money. In my opinion, you should be looking out for yourself right now - if you need the 401K money to retire, then don't pay it back to the credit card companies. But hey, that's just my opinion, and you are free to do what you deem is right.

Best of luck. I'm sorry to hear of your predicament.