Free Financial Advice

Financial Questions from Our Visitors - Page 13

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 am a 37 yr old Dad, Mr. Mom, Landlord, My wife is a school nurse, Our twin girls are 8.  We own 7 buildings, 6 of which are rentals that cashflow about $40k per year.  My wife grosses $31K.

Five out of the seven properties are paid for. We have no debt other than property debt, see below:

$161k at prime + 3/4 = 4.75%

$33K at Prime - .5% = 3.5% equity line, interest only, 90K still available in credit.

$101K at 0%, yes 0%, these are mortgages that I have paid off with credit card offers, I go from card to card as needed and back up any possible problems with the equity line. I realize this won't last for ever but am stretching it out as long as possible. Most of the current 0% offers last till next spring/summer of 04.

We are extremely disciplined, follow a budget and record all spending with Quicken. Our budget including vacations is about $32K per year. For Savings:

We have a 401K at $88k that is from my old job, I no longer can add to this but can move funds around, eventually, I could roll this into an IRA.  We have $73K at 2% in a savings, this is available at all times. I currently add $1600 per month to this.

Our Tax situation is good, I project that the 2003 Schedule E to show a profit of $18K, with an AGI of $44k & taxable income of $22k. When I combine state with federal rates, I figure that 22% of all interest deducted is money saved in tax but inversely 22% of all interest saved (not sheltered) is money I pay in tax.

Introduction to My Question: Knowing that my variable rate loans are eventually going to go up, I have a tendency to want to pay them down first with my available savings and cash flow but I have been holding out on this plan because of the monies at 0% as well as the fact that I am at such low rates and also because I have been wondering if I can invest at a much higher rate than my highest loan of 4.75%( keeping in mind it could be 6.5% in a couple of years).

Question: Do I start to pay down all debt ($295k) now and possibly complete the process within 8 years or do I invest the $73K and $1600/month for a better yield keeping in mind that my mortgage rates could climb?

Response:

I don't think you really need any help. It sounds like you know exactly what the consequences are of either of your choices. I've run into the same question lately and what I did was invest the money and use the monthly payments to pay down the credit card part of the debt. I chose to pay down the credit card portion (rather than the higher rate LOC), even though it was at the lowest interest rate, because the offers will soon expire, because it has the least tax benefit, and because it was hurting my credit score (for buying more properties).

In your case, it probably makes sense to pay down some of the debt and invest some of the money. If the market continues to go up, then use future money to pay down debt. If the market goes down, use future money to invest at lower prices.

Question:

I am 42 and my husband is 43. We both have jobs with pensions. We have good amount of savings in 401k and Roths. We have at least 80% equity in our home. We have a large monthly mortgage payment. I have an old job that will buy my pension out. Should I take it and pay off my mortgage that is paid off in two years. Then we can save that monthly money and put it toward colleges and high school.

Response:

Your decision may be kind of tough, as there are several factors complicating it. I can't tell you what the right decision is for you, but here are the factors that you should consider in making your decision:

First, is your ex-company making you a good offer? In other words, how much money are they offering to buy your pension out? To compute this, look at the value of all of the future payments that you would receive if you kept the pension, and then discount them to today's value. For example, if you are 42, your pension starts at age 60, and then lasts for 30 years at $100 per month, it should be worth about $7,500 today. This assumes a cost of capital of 5%. To find out about how much your pension should be worth (assuming most of these assumptions are decent estimates), multiply each $100 in monthly pension by about 75 times. So if your pension was for $200 per month, a lump sum payment today would be worth about $15,000 ($200 x 75). This rate is very sensitive to the cost of capital assumption, which is kind of a mix of the interest rate and the inflation rate. If the cost of capital moves to 4%, then the 75 multiplier would move to 100. In other words, the lower the cost of capital, the more the pension is worth today. This is probably too complicated to get into in this email, but you should be comfortable that the offer your company is extending to you is a reasonable one. If it involves a large percentage of your savings, then you'll probably want to talk to an advisor of some sort (an accountant could probably help you too) to make sure it is a reasonable offer.

Second, the tax consequences. If you sell your pension today, you will have to pay taxes on the entire amount this year, and it will be taxed at your ordinary income tax rate. Also, your ordinary income tax rate will be higher because you will have earned more (when you include the pension payoff).

Third, the mortgage payoff. By paying off your mortgage, you will lose some of your income tax deductions. Specifically, the interest portion of your mortgage payments will go away and you won't have the tax benefit. If you only have two years left on your mortgage, this effect won't really matter too much, since your interest payments are probably a low percent of your mortgage.

Finally, some positives about selling the pension:

- You will have the money and can manage it as you choose. Assuming you can invest the money at a rate higher than the cost of capital that your pension was earning, it will be to your benefit.

- You don't have to wait for the pension money. A typical pension is paid out for an indefinite period of time. By getting the money now, you will not have to gamble with how long you will receive payments. For example, if your pension starts at 60 and you pass away at 65, you may only receive five years of value. Check with the pension to see if this is a factor, as some pensions pass on to heirs, but most don't.

- Selling the pension and paying all of your debt means that each paycheck you receive can now be invested instead of used for paying down debt. For many people, they have more motivation to save than to pay down debt, so it may make it easier for you to save money going forward. However, be careful, if you are not a good saver, you may be likely to spend the extra take home pay instead of saving or investing it.

I'm sure there's more to consider than these, but this should be a good starting point for you to make a decision.

Question:

I am in what I would consider to be a unique situation for someone 33 years old. The house I own is paid for, I have no mortgage and I am selling this house. What I would like to do is use the money from this sale to pay off my other bills, i.e. credit, cars, motorcycles and then roll the rest of the money into a new home. What I wish to accomplish is to have only a single small mortgage payment. I expect to receive somewhere in the area of $120K to $150K for my current residence. My bills total about $61K. I have tried to get a home equity loan and also a bill consolidation loan, but it seems no-one will loan me money because I currently do not have a mortgage, even though I have spotless credit. How much, if any, of this money from the sale of my house is taxable and if it is taxable, how can I accomplish what I hope to accomplish without losing a substantial portion of my sale?

Response:

I find it hard to believe that you can't borrow money from your house. In fact, if your credit is good and you are the sole owner, I don't know of a single lender that wouldn't lend you at least 75% of the value. Anyway, if you're planning to sell the house, here are some rules of thumb to help you anticipate what your costs will be:

When you sell your home, you will have to pay taxes on the full sales price ($120k - $150k) less your cost basis. If your cost basis is zero (if someone gifted you the house) then the tax would be on the full selling price. Otherwise, calculate the taxable amount by subtracting the price you paid for the house from the sale price. This is somewhat simplified, but should be a good estimate of what is taxable.

The GOOD NEWS is that, if you've lived in the home for at least 2 of the last 5 years, there will be no capital gains tax. That means that the only cost to sell the house will be relating to the sale. These costs typically amount to about 8-10% of the homes value and include realtor fees (around 6%), title insurance, and other closing costs.

Assuming you've lived there for 2 years, you should net $50k - $75k after paying off your $61k in debt. This should be more than enough to use as a down payment on another home. If you have to pay taxes, the amount you'll keep will likely slip to $25k - $45k, which might make it worth it to stay in the home until you reach 2 years.

Question:

My husband is retiring next year (age 55). We owe approximately $40,000 or less on our home. We plan on selling our house in Texas and move to Michigan, and we want to be debt free when he retires in August 2004. Our home is worth at least $150,000. Should we refinance now and pay off all our debts or wait when we sell the house next year to pay off our debts of approximately $30,000.

Response:

If you are planning to sell your home in a year, it probably doesn't make sense to refinance now. The cost to refinance (appraisal, origination fee, lawyer and title fees, etc) will probably cost as much as the interest you'd save by just holding the loan and the $30,000 in debt until you sell the house.

However, if you're interest rate on the debt is significantly higher than the current mortgage interest rate you'd be able to refinance at (today it's 4% for a variable rate or 6.25% for a fixed rate), then you may want to consider refinancing the full $70,000 in debt ($40k mortgage plus $30k other debt). That would leave you with about $80,000 in equity in your home when you sell next year. Every 1% reducting in interest on $30,000 is $300 in annual savings (or $25 per month). Another consideration is whether or not you'd get a lower interest rate on the refinance loan than your current mortgage rate.

Question:

What should I do? I currently owe $48,000 on a 30 year home loan at 10% I bought the duplex in 1989.

Should I refinance, get a home equity loan, a line of credit? My payments have not always been on time and at times have fallen behind. I would like to buy more property.

Response:

My advice is to definitely refinance the loan (10% is ludicrous). And if you want to buy more property, don't ever fall behind on your payments (no matter what the cost). You may also want to take out money from your refinance to serve as a down payment on the next property you buy (you get better rates when you put down more money).

Question:

My husband and I are refinancing our mortgage of 7.25% and a home equity load of 9.5% into a fixed 30 year mortgage. We do have equity in our home but would like to lower our payments so we can save to pay off credit card debt. We have lots of debt and our credit is better but we have missed a few credit card payments six months or so ago.

A lender has offered us a 30 year load to cover both loans today fixed at 7.5% matching our current mortgage payment. Seems good, however, I was advised that if we take out a loan on the equity of our home and the appraisal is above the cost of the first mortgage, we would be making money with the loan and we would be taxed on the difference. Is this true? Does the sound remotely possible?

Response:

To answer your question, and assuming that you file your taxes in the United States, there is NO WAY that you will be taxed on taking out a new loan. In fact, to the contrary, the interest expense on the new loan should be tax deductible and actually lower your taxes (since the credit card interest you're paying is not tax deductible.)

Question:

I have two credit card bills (totaling about $16k). I have just received some money that would be able to wipe out the balances, but only leave me about $10k in my bank. One of the loans is a 0% on the balance until paid in full. Here's my question... I go crazy thinking that I owe debt (especially cc debt). Should I bite the bullet and pay them all off? Since they are 0% pay large chunks of them at a time until paid in full.? This decision is killing me and I don't know what to do! Please help. Thanks!

Response:

I recommend paying off your credit cards with the money you receive. Even if they are at 0% for a limited time (nothing is 0% forever, unless the minimum payments are really high), they will cost you much more if you don't pay them off before that time expires. Also, you mention that you "go crazy" thinking about credit card debt. That's the best reason of all to pay off the debt. And you'll probably sleep much better knowing that it's paid off. Just think of the cost that that kind of stress causes!

And even though it will leave you with "only $10k" in your account, you can use the money you would have spent paying the debt to invest or save in the future.

Question:

I would like to ask a question. I own a 2 family home. The rent we take in for our rental property pays the whole mortgage each month. Between my husband any myself we make about $70,000 per year. We have $98,000 left to pay on a 15 year mortgage and our house is appraised at $230,00. Although we are comfortable living in a 2 family we would like to own our own home but keep the two family for an investment for the future. The investment property is old but we recently put on a new roof and have installed all new replacement windows. The furnances will probably need to be replaced soon and some cosmetics need to be done in the part we occupy. We are thinking of taking a home equity line of credit to do some repairs and updates to the property but are a little weary of doing this. Would taking a line of equity be the correct thing to do? And what is your advice on how to go about buying a second home but keep this investment property?

Response:

Your question is complicated but I hope I can still help. The first question you ask is whether or not taking out a line of credit to fix up your property is the right thing to do. This is hard to answer, but if you think the improvements will increase or ensure future rental payments, then it's probably a good idea to fix up the place with funding from a line of credit.

Your second question, about how to buy another home and keep the current property as an investment property, is easy to answer. If the investment property pays for itself then you shouldn't have a problem getting a loan to buy another home. And if you need to, you could use money from taking out a line of credit on the investment property as a down payment on your new place (but don't tell your lender).

Question:

My 89 yr. old mother-in-law has two CDs about to come due. She's thinking of rolling them over, each is about $22,000. She is on a limited income, a small pension plus a monthly income from a reverse mortgage.

The reverse mortgage income will end soon as she is moving into an adult living facility on her doctor's advice. She has enough money to keep her in this facility for about four years and after that her family has to start paying her rent and other expenses. Since her health is beginning to fail, but not rapidly, I've suggested that she keep all of her assets as liquid as possible in the event she needs access to funds in the event of an emergency, especially a medical one.

What would you advise her to do with her CDs? Roll both over, roll one over or don't roll any of them over and stay liquid, or anything else?

Response:

I agree with your opinion that your mother-in-law should keep her money in a liquid account. With that said, CDs are pretty liquid accounts. You can remove your money before they mature with only a small penalty. And you can also buy CDs that mature in a very short period (months, not years).

Also, you mentioned that she has a reverse mortgage. If she is moving into an adult living facility she can likely sell her home and get the remaining equity.

I don't know enough of the situation to make the decision for you, but I would recommend estimating her yearly expenses (living, medical, etc) and then try keeping out at least that much in cash at any given time.