PERSONAL FINANCE

The most common personal finance decisions are some of the most destructive. Sound financial advice does not change to a great extent over time. However, bad money management ideas seem to mutate and thrive. Borrowing against home equity and retirement funds was once unthinkable. Today, financial services companies encourage people to do both. Lenders urge people to extend themselves to buy homes. Ultimately, it is up to you to resist bad advice and protect your own financial future.

HOME EQUITY LOANS

Lenders tout home equity loans and lines of credit as a way to pay off your credit cards. You will even hear some personal finance journalists parroting the company line that such loans make sense, because home equity rates are typically lower than the interest rates you pay on your credit cards and the interest is usually tax deductible. Low home equity rates and high credit card rates have convinced millions of people that this is the way to go. The only way this maneuver really helps is if you stop using your credit cards to run up debt. Otherwise, you are just digging yourself into a deeper hole. Home equity lending has its place as an emergency source of cash. Set up a home equity line of credit, which is a revolving account that works much like a credit card with a variable interest rate, in case you lose your job or need quick cash to meet some calamitous need. Many lenders will set up home equity lines for you at no cost, and the annual fees are usually minimal. Do not tap home equity to pay off credit cards or anything else that will not last as long as the debt. Unpaid credit-card debt can be erased in bankruptcy, the penalty for not making your home equity payments is losing your house.

Beware of variable rate mortgages. When interest rates rise, the amount of your payments increases. Never take out a mortgage with prepayment penalties. Should you have the need or desire to sell or refinance, your equity will be dramatically reduced. If your equity is small, it can make it impossible to obtain a new loan.

BORROWING FROM YOUR 401(k)

Employers do not have to offer a loan feature with their 401(k) retirement plans, but most do. Financial services companies have encouraged employers to make loans available, saying the ability to tap retirement funds will increase worker participation in the plans. The idea is that workers are more likely to contribute if they do not feel their money is being locked away. Those who borrow from their workplace retirement funds, think that it is a smart move, because when they repay the loan, they are essentially paying interest to themselves rather than to a credit card company or other lender. This is true, but 401(k) borrowers can be putting their retirement at risk. If you lose your job or get fired, the loan must be repaid, typically within weeks. If that is not possible, the outstanding loan balance is taxed and penalized as a premature distribution. You will be paying more for taxes and penalties. Since you cannot put that money back, whatever the money might have earned in future years is gone forever. That could cost you a lot in future retirement funds. Like home equity, retirement funds are best left alone to grow.

BUYING A HOUSE

Real estate agents want you to buy the most expensive house you can. The higher the price tag, the bigger their commission. Your lender is a collaborator. Not only will a larger loan rack up more fees and interest, but also, the lender knows you will move heaven and earth to pay your mortgage even when you are falling behind on other bills. They will tell you that it is okay to stretch to pay that mortgage, since your income will eventually rise and the payments will be more comfortable. Anyone who has been house poor knows the emotional, psychological and financial stress of stretching too far. Never buy as much house as lenders are willing to lend you. Buying too much house could mean giving up other things, a college fund for your children or a sufficient retirement fund. Sometimes people let maintenance and repairs go, and the value of the house declines with deferred maintenance. Mortgage payments are just part of the costs of owning a house. Homeowners should plan on spending at least 1% of their home’s value each year on maintenance and repairs. Limit your principal, interest, taxes and insurance to 25% of your total net income.

CERTIFICATES OF DEPOSIT

A certificate is an agreement to keep funds on deposit with the bank until the maturity date. Withdrawal prior to maturity will be permitted only with the consent of the bank, which may only be given at the time of withdrawal. A penalty/fee will be imposed if you withdraw any of the deposited funds before the maturity date. The early withdrawal penalty/fee will be imposed on the amount of funds withdrawn.

Depending upon the term of maturity, the early withdrawal penalty/fee imposed may be one to six months interest on the funds withdrawn.

The early withdrawal penalty/fee can be as severe as one-half of the interest that would have been earned on the funds withdrawn if held for the entire term plus a $25.00 early withdrawal penalty/fee. For example, on a certificate with a five year maturity, withdrawal after twenty months would have a penalty/fee equivalent to twenty months’ interest on the funds withdrawn plus $25.00. The bank would be borrowing your money interest free for twenty months plus fining you $25.00. This bank should pay an extra point or two in order to get your deposit.

Sometimes, partial withdrawals are not allowed.

Personal bankers will tell you that the early withdrawal penalties imposed are only one to three months interest on the funds withdrawn regardless of the term of maturity.

Do not make a Certificate of Deposit without a Certificate of Deposit Agreement and Truth-in-Savings Disclosure where both you and the personal banker sign. Otherwise, your signature card is your acceptance of the financial institution’s terms, which are subject to change.

Consider having all interest transferred to your checking account.

Never have a certificate automatically renew at maturity.

INVESTING IN MORTGAGES

Invest only in first mortgages.

Do not invest in mortgages that do not have reserve fund provisions for paying property insurance and property taxes.

Property tax liens have legal priority. In order to avoid foreclosure by tax collector, mortgage holders must pay property taxes in full.

When property owners owe money to the Internal Revenue Service, the IRS will file a lien against the property. Even though mortgage holders have legal priority, this will impede payment to them when the property is sold.

Even though It took several months to find a buyer for the property, the IRS will contend that the property is worth more than the market value and demand a property appraisal.

Mortgage holders must immediately send a courtesy warning notice to the owner/seller. When the notice time has expired, assign the account to an attorney for initiating foreclosure proceedings. Otherwise, the purchaser will tire of waiting and cancel the offer.

It is my recommendation that mortgage holders do not invest in multi-lender participating mortgages where you do not own and hold 100% of the mortgage. I refer to them as partial birth abortions. If you use an escrow agency, do not use one that is affiliated with the mortgage agency where you purchased the mortgage. They have a conflict of interest.

Do not buy mortgages where the property is located on tribal land. In case of default, you will not be allowed to foreclose.

INVESTING IN STOCK MARKET

If you buy long and you sign a margin agreement, your stocks may be loaned to others to sell short. This will have an adverse effect upon the price of your stocks.

Short selling is the selling of securities that one does not own. Short selling causes sudden and excessive fluctuations of securities prices generally and in such a manner so as to threaten fair and orderly securities markets and substantial disruption in the functioning of securities markets.

Artificial and unnecessary price movements based on unfounded rumors regarding the stability of issuers are exacerbated by “naked” short selling.

Short selling causes sudden declines in the prices of a wide range of securities. Such price declines can give rise to questions about the underlying financial condition of an issuer without a fundamental underlying basis, which in turn can create a crisis of confidence. This crisis of confidence can impair the liquidity and ultimate viability of an issuer with broad market consequences.

It is necessary in the public interest and for the protection of investors to maintain fair and orderly securities markets and prevent substantial disruption in the functioning of securities markets by prohibiting the implementation of short sales in publicly traded securities. When the regulatory agency (Securities Exchange Commission) fails to do this, it is investor beware.

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PERSONAL FINANCE

by Robert A. Kroboth www.citizengadfly.com

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