FINANCIALconnection
The downside of
accelerating loans
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We are looking at refinancing through
an “accelerating loan.” You put all your
monies in the account and it pays down
your mortgage daily according to your balance. Can you tell us about this new loan?
—Lisa Adams, Temecula, California
STOP LOOKING! With this type of deal you set
up a home equity line of credit (HELOC) and your
paycheck is automatically deposited into the account.
You then basically use it as a mega-banking account.
From it you pay all your bills, and whatever is left over
is used to pay down your mortgage. The idea is that
if the money you put into the account each month
(your paycheck) greatly exceeds your expenses, you
should have plenty left over after paying your bills to
make an extra-large mortgage payment. The allure is
that you will end up paying off the mortgage ahead
of schedule, saving thousands in interest payments.
I am all for accelerating paying off your mortgage, but not with a deal like this. First, you’re stuck
with a HELOC, and that means your interest rate
can and will change depending on the direction
of general interest rates. Even if you think interest
rates might be heading lower in the coming months,
there’s also the possibility that they could rise in the
future. That’s the risk with variable-rate loans, and
it’s a risk millions of homeowners are struggling with
right now. And if you ever run into a month when
your expenses exceed what you owe, you will have to
draw on the line of credit—that is, borrow more.
You can get your mortgage paid off faster without refinancing into one of these newfangled loans
(and paying refinancing lender fees). All you have to
do is send in extra principal payments whenever you
can on your existing mortgage. Make one extra payment a year on a 30-year mortgage and you will cut
your payback time down to about 25 years.
KEI TH LATHROP
My husband and I are 65 and started drawing
Social Security at 62. We also have one pension
for income. We didn’t plan well for retirement
and have only $10,000 saved. Any suggestions
on how to increase that amount?
—Shirley Hix, Surprise, Arizona
I WILL ASSUME you both continue to work; any
amount you can put away now is going to help for
when you are fully retired. Assuming you are close to
having your home paid off, you could be eligible for
a reverse equity mortgage. A reverse mortgage uses
your equity in the home as collateral for the loan.
A lender gives you a monthly payout, a lump-sum
payout or a credit line.
That can be a terrific income source for anyone
who owns a home but doesn’t have a lot of cash to
cover living costs. You will never be forced out of the
house. Only when you move or die will you (or your
estate) be required to repay the lender.
But again, there’s good protection here. The
amount owed will not exceed the value of the house,
so your heirs can cover the cost of repayment by selling
the home. You can learn more by going to www.ftc.gov
and typing “reverse mortgage” into the Search box.
We’ve opened a 529 college savings plan
for our two children and put away $100 per
month for each of them, plus gift money. My
concern is that when it is time for them to
go to college, what happens to this money if
they decide not to go? Do we get taxed on it
if we use it for ourselves? Should we invest
in a more flexible plan?
—Mei-Ling, San Diego, California
IF YOU MAKE withdrawals from a 529 that are not
used for your children’s education costs, you will owe
income tax and a 10 percent penalty on the earnings
portion (but not the principal). But here’s something
to consider: You can always change the beneficiary of
the account to another member of your family. So
if one child decides not to attend college, you could
make the other child the beneficiary of that account.
That gives you some extra flexibility.
Please explain the IRS rule regarding the
withdrawal of funds in a VIP account that
has had no tax withheld at the time of saving. There seems to be a requirement that
funds must be withdrawn by a certain age.
I am 65—do I need to be prepared for this
by withdrawing funds each year even if I do
not wish to?
—Michael Flohr, Hansville, Washington
A VOLUNTARY INVESTMENT Program (VIP)
account is a type of tax-deferred savings plan, much
like a 401(k). You were able to use pretax money from
your paycheck to fund your account and you have
not had any taxes levied while the money is invested.
But the important phrase here is “tax deferred.”
That is not to be confused with “tax free.” And the
deferral ends when you hit age 70 ½. Even if you
don’t want or need the money, when you turn 70½
you must start taking an annual required minimum
distribution, which will be subject to taxation.
While the federal government gave you tax
incentives to invest in the plan, at a certain point
(that point being age 70½) the IRS insists on finally
getting its share. Your plan sponsor can help you
estimate what your required distribution will be
once you turn 70½. C
