Archive for Ask the Advisor

Ask the Advisor – Should I refinance my mortgage to pay my holiday bills?

Ah, the holidays.  A time when you want to spend more money than usual, but your bills and paycheck stay the same.  According to the ubiquitous ads on the radio, you should be refinancing your mortgage and all of your financial dreams will come true.

 

Is this really the case?  I went to mortgage expert Dave Majcen, Vice President of Mortgage Lending at Guaranteed Rate Mortgage, to learn about the signs that you should refinance your home loan.  Here are his tips:

 

  1. Consider time frame:  Make sure you are staying in the house long enough to recoup the closing costs and monthly savings.  If you are unsure, look into a no closing cost refinance and let the lender pick up the tab.  This way your return on investment starts with your first payment.

 

  1. Don’t go backwards.  If you have been paying on your 30 year fixed mortgage for 10-15 years, don’t go back to a 30 year fixed or you will be paying interest on top of interest.  Consider a 15 year fixed with current rates below 3% and put more towards principal.

 

  1. Use a trusted local lender.  In Colorado, appraisers won’t even accept orders from out of state lenders.  If they do, it can take months and the costs can be much higher than average causing frustration.

 

  1. If you are paying mortgage insurance, consider refinancing now.  Values in Colorado have risen substantially which will allow you to refinance and eliminate mortgage insurance and reduce your interest rate.  A win, win!

 

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Thanks for the perspective!  For more info or to see if a re-fi is right for you, contact Dave Majcen at 720-399-7065 or dave.majcen@rate.com.

Ask the Advisor: What you Need to know About Divorce and Money

I recently received a question from someone who wishes to remain anonymous: he and his wife are considering separating and he was wondering about his next step financially – specifically about relocating and what his options are.

 

Divorce is an unsettling time and one of the biggest concerns is where to live.  And this is a question I have had often from recently divorced people:

 

Should they use their portion of retirement accounts to buy a new house?

 

If a large part of your divorce settlement comes in the form your former spouse’s retirement accounts, it can be tempting to use that money for a down payment on a new house.  Here is why I discourage this idea:

 

You will take an enormous tax hit:  Say you want to use $50,000 out of a 401(k) plan to buy a house.  You will be adding $50,000 to your annual income for the year (in addition to work and/or maintenance payments) for tax purposes.  If you are under age 59 ½, you also will be hit with a 10% early withdrawal penalty.

 

If you are in the 25% tax bracket, that $50,000 withdrawal will cost an additional $12,500 in taxes plus $5,000 for the IRS penalty.  So, that $50,000 down payment actually costs you $67,500 after you pay the IRS.

 

You sacrifice your future retirement:  Using the example of the $50,000 withdrawal, let’s figure out what you will give up in retirement security by using that money for a house.   Say you are 45 years old and will retire at age 65.  If you average 7%/year growth in a stock mutual fund over 20 years, that $50,000 would be worth $179,000 at retirement.

 

You may not know where you want to permanently settle right after your divorce:  My realtor friends tell me that buyers shouldn’t expect to make money on a home purchase if they are in the home for less than 5 years.  Commissions, moving expenses, and uncertain real estate values make a home purchase a long term investment.

 

Since divorce is a time of adjustment, it’s hard to say where you will want to live 1, 2 or 3 years after the split.  Maybe a new job will require relocation.  There may be child custody arrangements that necessitate a move.  It may make sense to take 6 months or so to rent and see what happens in your life before you commit to a new real estate purchase.

 

Although you are likely feeling unmoored after a divorce, don’t let emotions cloud your smart financial judgement.  Taking money out of a retirement account to buy a house was a bad idea when you were married and that doesn’t change after a divorce.

 

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Welcome to My New Monthly Ask-The-Advisor Blog!

For the inaugural Ask-the-Advisor blog, I answer a question from Jennifer, a mom whose teenager who needs help managing her cash.

Q:  I have a teenager who I believe is ready to take the step into having a debit card to access her funds. Our bank will not allow us to do that without a driver’s license (so they have to be 16). Do you have any recommendations on how I can do something like this? What tips can you give me that I can pass on to her about being responsible with the card?  As she gets older, should we get her a credit card or would you suggest staying with a debit card?

A:  If your teenager has enough cash to warrant a bank account, congratulations!  Using a debit card is a good way to introduce kids to the eventual world of credit cards without the risk of running up huge bills.

 

Some typical employers of teens (I’ve heard this about Noodles and Company from a friend) only pay employees via debit card, not regular paychecks, so knowing how to use these tools is a must.

 

The trick can be finding a provider that will issue debit cards to younger teens.  Here are a few that I found with a quick Google search.

  1. Wells Fargo Teen Checking™ for kids aged 13-17
  2. Chase High School Checking ™ for ages 13-17
  3. Young Americans Bank

 

There are others and all sorts of fees and rules apply, but that should get you started.

 

Tips for being responsible with the card:

  • Take her to a meeting with the banker opening the account to have her hear from the bank (not you because who listens to their mom anyway) the fees for purchases, overdraft costs, etc.
  • Find out what technology is available from the bank to keep her aware of her spending (alerts, balance updates) and encourage her to use them.
  • Don’t rush to bail her out of mistakes. If she overspends, make her pay the fees and penalties.
  • Have her keep some cash on hand so she is not whipping out the card for every small purchase. Remember, it’s mentally easier to spend on a card than part with physical cash (Starbucks?), so don’t abandon the using green stuff altogether.  Save the card for larger purchases when you don’t want to be carrying $200 in ones around the mall.

 

A student should probably have exposure to a credit card before heading off to college.  That way a parent can still be helicoptering and put a stop to spending before it gets out of hand.  Credit cards are a great way for young people to build (and ruin!) their credit scores. Before they get out of college and need to rent and apartment or buy a car, it’s important to have created credit history.

 

I hope that helps Jennifer and all you other parents of teenagers.  Please contact me with other questions for the Ask-the-Adviser blog.  It’s so much easier than coming up with all of the topics myself! Kristi@sullivanfinancialplanning.com