FINANCIALconnection
Email your personal-
finance questions to:
suze@costco.com.
Please include
“Suze Orman Q&A”
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Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088.
Ask Suze
Orman
To HELOC and back
Also:
■ Franchise
financing
■ Deferred
interest
Suze will answer
selected questions in
this bimonthly column.
She regrets that
unpublished questions
cannot be answered
individually.
By Suze Orman
My wife and I are in our mid-50s, earning
about $105,000 a year between the two of
us. We have a mortgage of $115,000 and a
home equity line of credit of $27,000 with
a variable rate. We don’t have any other
debt to speak of. We have IRAs, pensions
and a SARSEPP (Salary Reduction Simplified Employee Pension Plan) totaling about
$150,000, and about $10,000 in savings. We
also will be receiving Social Security when
we retire.
We are about to receive a $70,000 inheritance. What do you think is our best use of
the money?
Jim and Mary
Ohio
ARE YOU SURE it’s not a home equity line of credit? The super-low 3 percent interest rate sure makes
it sound like a HELOC. As discussed in the preceding question, HELOC interest rates are variable, and
that raises the risk of dealing with higher required
payments when interest rates begin to increase.
I want you to focus on paying off that debt, regardless of what type of loan it is. You’ve broken one
of my cardinal rules: Never put your home on the
line for a business investment. What if the franchise
doesn’t pan out? And if you can’t keep current with
the payments, you risk losing your home to settle
that debt. Moreover, it makes no sense to cover only
the interest payments on any loan. The goal with
debt should always be to get it paid off over time. If
you’re just paying interest you’re not making a dent
in your loan principal. That’s not a smart strategy.
WITHOUT A QUESTION I would pay off the
home equity line of credit (HELOC). As you note,
the interest rate is variable. Eventually interest rates
will move up, and the monthly cost will increase.
Insulate yourselves from that future risk by getting
the HELOC paid off.
That will leave you with more than $40,000. I
think you should have more set aside in your emergency savings; the $10,000 you have now could
cover nearly 10 months of your mortgage payments, but what about other living expenses? Make
sure you have at least eight months of cushion for
all your ongoing living costs.
If you intend to stay in your home when you
eventually retire, and you currently aren’t on pace to
have the remaining mortgage paid off by retirement
age, I want you to look into adding extra money to
your required monthly payment. You can contact
the company that holds your mortgage and ask
them to calculate what your required payments
would need to be between now and retirement
to have the mortgage paid off. Because you are
still working, my advice is to see if you could
handle that extra payment, or at least a part of
it, from your monthly income.
Finally, I’d love to see you boost your retirement savings. You and your wife can contribute $6,000 a year each to a Roth IRA.
e
Suze Orman’s TV
show airs Saturday
nights on CNBC. Suze
can be contacted at
www.suzeorman.com.
BRIAN BOWEN SMITH
My wife and I are in the process of purchasing a new washer. The options for purchasing an appliance of this size range from
discounts with cash in hand all the way to
purchasing on credit with deferred interest
for up to 12 months.
My wife is 29 and I am 28. We both have
good credit, own our home and have begun
building our savings. We recently purchased
a new laptop with the deferred-interest incentive on a line of credit and did the same
with some living room furniture. At any
time we have the ability to pay off both bills
in full and still have enough in our savings
for emergencies.
Should we consider doing the same
with our new washer or will playing this
game eventually hurt our FICO scores?
James S.
Oregon
More in archives On Costco.com, enter “Connection.” At Online Edition, search “financial connection.”
I have a mortgage balance of $108,000.
May
New York
JUNE 2012 ;e Costco Connection 17
THAT YOU CAN pay off all the purchases with
your current savings tells me you aren’t using these
financing options to live beyond your means. As
for your FICO credit score, the way the scoring
system works it’s actually good to have a mix of
different types of credit, so having one or two of
these types of store accounts can be a plus. That
said, you don’t want to go overboard and be open-
ing new debt lines on your record every few
months. That’s a clear demerit in the eyes of the
FICO scoring system. [See page 23 for more credit-
score information.—Ed.]
The big issue here is what happens when the
deal period expires. You didn’t tell me what the
interest rates become after the deferral period is
up. I bet you realize it makes little sense to pay
interest when you don’t have to. I am a big believer
that the more you can pay for in cash, the more
financially secure you will be. Pay as you go is the
way to go. C
