Handling a Windfall

July 27, 2012 By 8 Comments

What would you do if you were handed $10,000 tomorrow? $20,000?

The easy default answer-if you spend time in the personal finance world-is to pay off debt and save the rest.

But is that the right answer?

When my mother-in-law died, we inherited a little bit of money, a house that hasn’t been updated since the 60s, and a new-ish car that still has an active loan.

We also have about $16,000 in credit card debt and a small mortgage.

The Dave Ramsey answer would be to pay off the card at all costs and worry about the inherited house later, but that seems off. If we modernize the house and fix the things that are broken, we have a mortgage-free rental property. Our local rental market is strong; we should be able to clear $800 per month after expenses.

Is the right answer to pay off our card and scrape to get the house ready or should we fix up the house and use that new income to pay off the card?

My wife has also inherited an IRA that-due to its status as a Beneficiary IRA and the fact that there have been disbursements-has to be drained within 5 years. It’s not huge. After taxes, it’s about the size of the car loan. Should we make the $200/month payments, or cash out the temporary IRA and make the car loan go away immediately? Should we cash out the IRA and open one for my wife?

Although the cause was sad, these are good problems to have. If we manage this right, we’ll be more financially stable than we would have been for decades, otherwise.

I want your opinion, please.

2 questions:

1. House or credit card?

2. What would you do with a $10,000 IRA that has to be cashed out over the next 5 years?

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Refinancing Your Existing Loan to Purchase An Investment Property

December 1, 2011 By 2 Comments

Many people are looking at the housing market slump right now as an investment opportunity. Here are a few of the things that you need to know before getting a new home loan or refinancing your existing loan in order to make that happen.

Amount You Want to Borrow

A lot of borrowers go shopping for real estate and have exactly no idea how much money they can borrow. One of the first questions that you need to ask before going real estate hunting is how much can I borrow. You can ask a bank, lender, or financial institution to give you a ballpark figure of the amount of loan that you would qualify for. This will make it easier for you to narrow down exactly what type of property you can afford and what areas you can concentrate on.

Amount of Interest You Will Pay

Too many people are overly concerned with the purchase price of the home that they are buying. They fail to find out how much interest they will have to pay back to the bank in order to make their home ownership dreams come true. This is where a home loan calculator can be really useful. You can find out exactly how much interest you will repay over a 10, 20, or 30 year loan time period. You can also change the interest rate and down payment amount on those calculators to see if you can secure a lower monthly payment.

Credit Score Needed to Qualify

It doesn’t matter if you are buying a home for the first time or refinancing an existing loan. Your credit score matters. You need to start doing some research now if you want to secure a loan with a really low interest rate. This involves taking the time to see what credit scores traditional lenders are looking for and doing the work necessary to qualify for this loan. Your credit score will make a big difference in determining if an investment property purchase is a profitable endeavor or one that winds up costing you money. It will depend heavily on what kind of loan your credit score allowed you to negotiate.

Make the Choice

Once you know how much you will need and exactly how much you will be paying out over the life of another mortgage, you can decide whether you want to refinance your current home loan to get another one. Adding on another huge debt to an existing one is a big risk. Make sure to think it through fully before jumping in.

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Winning the Mortgage Game

October 26, 2011 By 6 Comments

There’s a game that’s often mistakenly called “The American Dream”. This game is expensive to play and fraught with risk. It single-handedly ties up more resources for most people than anything else they ever do.

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The game is called Home Ownership.

At some point, most people consider buying a house. On the traditional, idealized life-path, this step comes somewhere between marriage and kids. That’s usually the easiest way to organize it. If you have kids first, you’re much less likely to buy a home. This is a game with handicaps.

Once you get to the point where you are emotionally ready to invest in the 30-year commitment that is a house, your first impulse tends to be to rush to the bank to find out how much money you can borrow.

That’s a mistake. If you take as much as the bank will qualify you for, you’re most likely to overextend yourself and end up losing your house. That’s the quick way to lose the home ownership game.

The best thing you could do is figure out how much you can afford before you visit a bank. Conventional wisdom says that your mortgage payment should be no more than 28% of your gross income, but that’s absurd. Who builds their budget on their gross income? I like 28%, but only of your net income. To make the numbers easier to remember, I’d round it to 30%. If you take home $3000 per month, your mortgage payment should be no more than $900 per month.

From there, it pretty easy to figure out how much house you can afford. Using this e mortgage calculator, you’d be able to afford a mortgage of $175,000 if we assume an interest rate of 4.5%. Throughout most of the United States, that will buy you a reasonably sized home, though certainly nothing ostentatious. Clydesdale Bank also has an excellent loan calculator.

Some people like to start out with an interest-only loan. That same emortgage calculator shows that an income of $3000 per month would be able to afford a $240,000 with almost the same payment. That seems like a good plan, but eventually, you’ll have to pay more than just the interest. Taking out a loan that will one day be more than you can afford on the assumption that you’ll be making more money by then is not sound financial planning. That’s the same logic that helped me bury myself in debt.

When you buy a house, make sure to base your payments and your mortgage on what you can realistically afford. Anything else, and you’ll only end up poorer and less happy than when you started.

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Money Problems: Day 10 – Debt Insurance

July 13, 2011 By 6 Comments
Mortgage debt

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Today, I am continuing the series, Money Problems: 30 Days to Perfect Finances. The series will consist of 30 things you can do in one setting to perfect your finances. It’s not a system to magically make your debt disappear. Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days. That’s not my schedule. Also, I think that talking about the same thing for 30 days straight will bore both of us. Instead, it will run roughly once a week. To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, Day 10, we’re going to talk about debt insurance.

Debt insurance is insurance you pay for that will pay your lender in the event of your death, dismemberment, disfigurement, disembowelment, or unemployment. Exactly what is covered varies by insurer, type of debt, and what you are willing to pay for.

Private Mortgage Insurance(PMI) is a common form of debt insurance. Generally, if you take out a mortgage with a down payment under 20%, you’ll be expected to pay for PMI. According to the Homeowners Protection Act of 1998, you have the right to request your PMI be cancelled after reducing your loan amount to 78% of the appraised value of the property. That ensures that the lender will be able to recoup their money by seizing the mortgaged property if you should happen to fall under a bus or get hit by a meteorite.

Another common form of debt insurance is for your credit cards. Card companies love it when you buy their insurance. If you buy their life insurance, your card is paid off when you die. Disability insurance pays it if your get hurt. Unemployment insurance…you get the idea.

Here’s the deal: Get life insurance and disability insurance separately. It’s cheaper than getting it through your credit card company and let’s you get enough to actually live on if something tragic happens. Unless, of course, you die. Then it will leave enough for your heirs to live on.

As far as unemployment insurance, build up your emergency fund instead. That’s money that gives you options. Credit card insurance is money flushed down the toilet. Many of these policies cost 1% of your balance. If you’ve got a $5,000 balance, that will mean you are paying $50 per month. By comparison, if you’ve got a 9.9% interest rate, you’ll be paying about $40 per month in interest.

Debt insurance is a bad idea, if you can possibly avoid it. A combination of life insurance, disability insurance, and an emergency fund provide better protection with more flexibility.

Your task for today is to review your credit card statements and mortgage agreement and see if you are paying debt insurance on any of it. If you are, cancel and set up the proper insurance policies to protect yourself and your family.

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