THE FINANCIAL CONNECTION
Q&A WITH SUZE ORMAN
Beware of interest-only mortgages
On a $200,000 fixed-rate mortgage yourhome. Suze Orman
charging 6 percent, an interest-only mortgage
will cost you about $1,000 a month, while e want to finance the college educa-
a regular mortgage—where you are paying Wtion of our two young children. Would KEI TH LATHROP
both the interest and the principal—will run it be wiser to begin investing in a 529 s it wise to take out a home-equity line of you about $1,200 a month. College Savings Plan and make minimum Icredit (HELOC) to purchase a new car?
Interest-only mortgages—which make it use a regular mortgage, after 10 years, your
easier for people to qualify for a home balance will be down to $167,000; you’ve
loan—seem to be all the rage. Do you built up more than $30,000 in equity, com-
recommend this type of loan for anyone? pared to zippo with the interest-only loan.
—Greg Sylvestri, Arlington, Texas I also don’t buy the argument that interest-only loans are fine because you can just
The best move you can make is to have move before the principal charges start. Nor
no interest in an interest-only mortgage. The should you think that your home is guaran-only reason lenders offer interest-only loans teed to appreciate enough so that you can sim-is that they know a lot of consumers simply ply afford to sell and trade up to another home
can’t afford to buy a home with a conven- with a regular mortgage. Great ideas, but there
tional mortgage. So the lenders have come is no way you can be sure you will be able to
up with a deceptively enticing offer: Pay no pull this off.
principal on your loan in the early years of Real estate is a terrific long-term invest-the mortgage. ment, but you don’t want to be playing with
Paying $200 less each month sure has your payments on our mortgage, or commit any —Allen Garcia, Antioch, California
interest, right? Well, be very careful. extra money to paying off our mortgage in
All you are doing is delaying payment of
15 years, thereby freeing up money to pay It is not wise. When you take out a
the principal. If you spend the first 10 years monthly tuition fees? HELOC, your home is the collateral for the
of a 30-year mortgage paying interest only, —Jonathan Regehr, Olathe, Kansas loan. If for any reason you fall behind on your
when you do start repaying the principal you payments, you could lose your home. That
will need to get it paid off in just 20 years. I love that you are so focused on doing means you might still have the car, but you
That will translate into a steep upward adjust- the right thing for your family. But it’s what wouldn’t have a garage to park it in.
ment in your monthly mortgage. you didn’t ask me that caught my attention: I also don’t like using an open-ended
Getting the $200,000 paid off in 20 years What about your retirement? HELOC loan to pay for a car, because I think
will cost you approximately $1,433 a month. The best move you can make as a parent it’s important to finance a car with a loan that
That’s an increase of more than 40 percent is to make sure your financial future is secure. is no longer than three or four years. That way
from $1,000. There’s no way you can be sure That means taking care of everything to en- you can drive the car for “free” for a few years
your income will have increased enough in sure you and your wife will have a comfort- after you have paid off the loan. That’s the
that time to handle the big bump in cost. able retirement before you invest one penny financially smart way to drive a great car deal.
And I can’t resist pointing out that if you in a college fund. If you need to take five or six years to
You should be contributing to company- repay a car loan, that’s a sure sign you are
QAsponsored retirement plans—especially if buying a car you can’t afford. HELOCs give
your boss kicks in a matching contribution— you too much time to pay off the loan.
and funding a Roth IRA if you are eligible. Yes, I know the interest on a HELOC is
(Married couples filing a joint tax return can tax-deductible. But don’t be blinded by the
each contribute $4,000 in 2005 if their com- tax break. Plenty of car companies offer 0
bined income is below $150,000.) percent financing loans to consumers with
If you are maxing out on your retirement FICO scores of at least 720, or just 1 percent
savings, then I like your notion of paying off or 2 percent if your FICO score is slightly
the mortgage ahead of schedule, but only if lower. That’s a lot better than the 5. 7 percent
this is a home you intend to stay in. Not only or so on a HELOC. C
are you getting rid of your single biggest
monthly cost ahead of retirement, but you are Suze Orman is the author of five consecutive
also saving yourself some major money. On a New York Times bestsellers, including her
$200,000 30-year mortgage at 6 percent you latest book, The Money Book for the Young,
will save more than $120,000 in interest pay- Fabulous & Broke. She also hosts her own
ments if you can pay off the loan in 15 years. national CNBC-TV finance show, which airs
After that, by all means start saving for on Saturday nights, as well as the Financial
college. And don’t feel guilty about making Freedom hour on the QVC network. She can
the college funds a lower priority in your be contacted at
www.suzeorman.com.
financial life. Remember: There are always
loans and scholarships for college. But there is
absolutely no loan for your retirement years.
&
Ask Suze Orman
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Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088
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Suze will answer selected questions
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regrets that unpublished questions
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