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Financial Questions from Our Visitors - Page 8

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:

My wife and I currently own a home in Pennsylvania. I will be retiring in about 2 years. At that time we would like to move to Florida and buy a home there. My question to you is would it make sense to refinance our home and use the equity to purchase a home now to take advantage of the low interest rates now available and to avoid the possible increase in Florida real-estate? We would appreciate any advice you may have or if you could suggest a better option. We have enough equity in our home to pay cash for the retirement home.

Response:

I couldn't tell from your email whether you are planning to keep your home in Pennsylvania or sell it when you move to Florida. If you are planning to sell your PA home, then it doesn't make that much sense to take any money out for the Florida home yet, as you will receive the money you need for Florida when you sell the property. And you would be paying interest on the loan for an additional two years. However, if you wanted to own both properties for the next two years, then it may indeed make sense to take money out of your primary home rather than to get a new loan on a second home (because interest rates on a primary residence are typically lower than second homes). You could compare interest rates of a PA home equity loan to a FL rate for a second home to see which one is lower.

If you are planning to keep the PA home, then it could definitely make sense to take out a home equity loan now, even if you don't buy the Florida house for another two years. Although interest rates could change a lot over the next two years, they likely won't go much lower. Also, by locking in a rate now, you take further risk out of your future, by ensuring a relatively low interest rate and by knowing what your future mortgage obligations will be (which makes it easier to become comfortable with and plan for your retirement). One option could be to take out a home equity loan now for a lesser loan amount than what you expect to spend on the Florida home. The loan should be lower than the expected purchase price by the amount of money you expect to 1) earn on the home equity loan, plus 2) the amount of money you can save during the next two years and apply to the new home.

Regarding finding other options, I can't think of any other innovative or unique ways to accomplish your goal. Luckily, you are in a great position by having lots of equity in your current home.

Best of luck,

Question:

Some advice please..

Which is the better option for me? To sell my house to pay off debts (3 CCJ's) (enough equity to do so plus have £30,000 profit), or to borrow on the strength of the equity to pay off debts and incrase mortgage payments.

House valued at £100,000. Purchase price 5 yrs ago £40,000.

Confused as to what to do .

Response:

It's really a matter of preference as to whether you sell your home or take out a home equity loan to pay off your debt. I would almost always choose the home equity option. If you can afford the higher mortgage payment, it's probably worth it in the long run. I'm not exactly sure of the tax laws where you live (noticed you measure in pounds, not dollars), but in most countries there are significant tax breaks for mortgage loans. Also, since interest rates are so low, the money that you'll borrow should be at a very reasonable rate. Furthermore, it costs a lot of money to sell a house (typically a 6% fee paid to a broker, and that's on the whole 100k price). Chances are the interest rate on your equity loan will be close to 6%, and you'll only pay it on the 30k. Also, if you sold your home, you'd still have to pay rent somewhere else.

Question:

We have a house paid for (small). We found a larger house we really want, however our house that is paid for has been on the market for 1 year with no one even looking at it, we have gone through 3 realtors., and still no interested parties. We have a lot of $ in Savings, but don't want to spend it all on a house. We are debt free and do not want to make a mistake by going into debt by taking a loan out for this bigger house, We thought about renting our current house, but there are a ton of rentals in our area for cheaper than we could rent ours out. Do we really want 2 houses, with taxes, insurance, maintenance. etc... Thank you so much for any advice.

Response:

It's a tough call as to what your best choice is, and it is really up to you to decide what you really want. It sounds to me like you really want to get rid of the house (and not turn it into a rental). Here are some points to consider when making your decision:

- The housing market is doing pretty well right now. If you haven't been able to sell your house for the last year then there's probably a good reason. Either the area or the house is probably worth less than you think. If you really want to sell it, you'll probably have to drop the price further or find a creative way to get rid of it. Unless you know of something changing in your neighborhood to make the house more attractive, there's no reason to think the house would sell much better in a few years.

- Creative ways to sell your house include: Offer seller financing, whereby you give someone a loan or partial loan so that they can more easily buy the house. Offer the property for trade. An example would be to offer the sellers of the house you want to buy your current house plus more money. Sometimes, especially when you build a house, you can coax the builder into buying your house (it's incentive for you to buy from them versus an existing house). Another creative way to sell a house is to create a rent-to-own contract (I forgot the technical term for this) with the buyer, whereby the buyer will rent the property with the option to buy at a fixed price in x number of years. There are lots of other creative ways to sell a house that your real estate broker will never tell you about.

- Regarding turning the house into a rental. This could be a very good idea if you were interested in dealing with tenants, two mortgages, more complicated tax laws, and most importantly, if you thought you could get enough money from the rental to offset a decent part of your new mortgage. The upside to this is that owning investment property is more times than not a good investment. The downside is that you do take on more debt (than selling it and buying a new house) and more risk.

- To make your final decision, weigh the risk of keeping the house as a rental against the discomfort of continuing to live there, against the cost of having to sell it for less than you think it's worth. Whichever option is most comfortable (or least painful) to you is likely your best.

Question:

Are there any penalties/taxes for a full loan against your 401k savings if it's for a down payment for a home?

Response:

There are two types of 401k withdrawals to buy a house. The first is to borrow the money as a loan, in which you pay the money back to your 401K account. This type of transaction has no 10% early withdrawal penalty associated with it. And the interest you pay on the loan will actually be credited to your 401K account, so you will not lose any of your retirement savings by taking this route. If you can afford to make the additional loan payments, and if your employer allows this type of transaction (many do not), then this is almost always the best route to take. One thing to consider when using this option is that your 401K loan typically has to be repaid as soon as you leave your employer. Check with your employer to see if this is the case.

The other option would be to take an early withdrawal on your 401K to "buy, build or rebuild a first home" (according to IRS rules). This type of transaction would also be exempt from the 10% penalty, however, you would have to pay regular income taxes on the entire amount of money withdrawn (at your marginal interest rate). For example, if you withdrew $20,000 to purchase a house and your income tax rate is 28%, you'd have to pay $5,600 in taxes (either at the time of withdrawal or when you pay your taxes) and would be left with only $14,400 to contribute to your house. This option is also a useful way to purchase a home, but is inferior to taking out a 401K loan. It is inferior because of the taxes paid, plus the fact that you are really only reinvesting $14,400 of the withdrawal amount into the house rather than the $20,000 amount that was invested in the 401K. In the earlier option, the full amount of the 401K remains invested and the additional interest payments flow into the 401K.

Question:

I have used your expertise in the past and really need your help. I am soon to be 47 and like every middle aged man am thinking about retirement someday. I need your advice and help on my financial situation.

Here is what I have so far. I have two debts, my house nine years left at $803.00 per month and 2002 Chevrolet Tahoe, four years left at $522.00 per month. I make approx $35,000 per year with my wife bringing home about the same. Together we dump about $310.00 per month into our 401K plans at work, plus another $150.00 into our Janus fund. We have about $5,000 into the stock market, another $50,000 in my 401K and about $1,000 in my wife's 401K at work. An insurance policy worth about $700.00, $500 in a Roth IRA., and $4,100 in our Janus fund. and about $8,000 in CD's.

Here lies the problem. I am sick and tired of getting a return on our CD's of a whopping 2%. But on the other hand, I am way! to scared to invest in a mutual fund or the stock market, it seems like every time I invest in a stock it plunges to the bottom of the ocean. I want to do something with this hard earned money, invest it somewhere, but I want and need it to be safe..............help!........what do I do with it, some of it, all of it.............please help.......

Response:

Depending on when you retire, you have quite a few years left to invest your money, which means that time should work to your advantage. For example, if you plan to retire at age 60, then you have 13 years left to invest your money. Because you have 13 years left, it is safer for you to invest money in the stock market than if you only had a few years left to invest. And if history is any kind of an indicator, the stock market is by far the best way to invest money for that amount of time. During the past 100 years, the stock market has outperformed every other asset class over ANY 10 year period. And if that holds for the next ten years, then it means that your best choice is probably to invest it again in the stock market. And in reality, even if you retire in 10 years, you will still need to have most of that money invested for the next 30-40 years of your remaining life (which means that you really have quite a long time horizon to invest). I hope that answers one of your questions, the second question really relates to how to invest in the stock market but not take on too much risk. Here are my thoughts on that:

The best portfolio is always a well diversified portfolio. By spreading out your investments across many different funds, you will have less overall risk. If one of your investments falls, hopefully some of your other investments rise. Anyway, assuming that you have about 10-15 years until retirement, and that you want to take on as little risk as possible, I would recommend a portfolio that includes the following types of investments: Growth oriented mutual funds (20-40% of your portfolio, invest some in the small caps and some in large caps), Income stock funds (10-30%, these focus on providing stable income while investing in stocks), Bond funds (10-25%, increase this percentage as you get closer to retirement, may want to find a blended term fund that invests in long term bonds and short term bonds), individual stocks (0-10%, invest in stocks that make you feel good and that you think will provide long term growth), Cash (5-10%, keep this in short term CDs or a savings account for emergencies). As you get closer to retirement, you'll want to move more money into the stable accounts (bond funds and CDs). There is really no hard and fast rule as to how much to invest in each type of asset, but you should always make decisions that you agree with and that you are comfortable with. And remember, the more risk you take (as long as you are diversified), the higher your return should be.