Should you pay off the mortgage?
May 18, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
One of the best financially freeing moments in life is the day you compare your savings and mortgage principal balances and realize that you could pay off your mortgage if you wanted to. If you’re at that point, congratulations! If you’re not there yet, keep saving; it can come sooner than you think.
Of course, immediately following the discovery of being able to pay off the mortgage comes a question: should I? Here’s how you decide:
First, consider what you would do with the money if you didn’t pay off the mortgage.
Would it sit in savings, be invested for long-term retirement goals, or something else? Based on your plans if you didn’t pay off the mortgage, you can estimate a rate of return you expect to receive. From this rate of return, you’ll need to subtract taxes paid on the earnings (15% if capital gains, your income tax rate if regular interest).
Second, figure out what your mortgage is costing you.
Look at your interest rate, calculate the annual interest expense, and subtract any income tax savings you’re receiving. Be sure to avoid over-estimating the benefits of tax savings. For example, if your mortgage interest is $5,000 and you have another $8,000 of itemized deductions, your total itemized deductions are $13,000. If you’re married filing jointly, the standard deduction is $11,400 this year. So the mortgage interest is only increasing your deductions by $1,600. If you’re in the 28% tax bracket, this equates to a $448 tax savings.
Third, compare your answer in step 1 with your answer in step 2.
If it’s costing you more to keep your mortgage than you would earn with the money invested or in the bank, then you should generally pay off the mortgage. If you can get a greater return on your investments than what your mortgage is costing you, then you should generally keep the money invested and wait to pay off the mortgage.
Of course there are exceptions and other considerations including:
If you would be taking the pay-off money out of a pre-tax IRA or deferred compensation in a lump sum, take a really close look at the tax consequences of that lump sum withdrawal! They can often totally cancel out any savings on the mortgage interest.
If you would be using “retirement” savings funds to pay off the mortgage, you really need to look at your retirement projections and ensure that they still work with the funds withdrawn. If your projections rely on you beginning to save what you’re currently paying on the mortgage, know yourself. Will you stick with this savings program? If not, probably best to just keep your retirement funds intact and continue paying the mortgage.
If paying off the mortgage would take your emergency funds dangerously low or short-change funds for other important goals, it’s likely not a good idea.
Making your decision
While it seems like a fairly straight-forward question, when you think about the whole picture, you realize there are lots of what-ifs and options to consider. The important thing is to take time to do your homework, complete the analysis, and seek professional assistance if needed.
Even if the process reveals you’re better off with the mortgage, you might still want to go ahead and pay it off because of the peace-of-mind benefit that comes from not having any debt. If that’s the case, by going through the process thoughtfully and thoroughly, you will know what you’re giving up financially for that peace of mind so you can make an informed decision about whether it’s worth it to you.
And if the process does show that you would be better off getting rid of that mortgage, you can move forward with confidence.
Of course, everyone’s situation is different. While the process described above addresses many considerations, you may have some issues not addressed here or that are unique to you. Make sure you fully consider your own situation before making any decision.
Recovering from Unemployment
January 11, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
If you’ve been out of work for a period of time, it’s a huge relief when the paychecks start rolling in again. Depending on how long you were unemployed, what your finances were like before the job loss, and other sources of income in your household, getting back to work could be just the beginning of a long recovery process for your finances.
But here’s the good news. While you were unemployed, you and your family probably got used to spending less. Those habits can now be a huge benefit to your finances long-term, in some cases even allowing you to be stronger financially within a couple of years than you were before the lay-off.
To make this work, you need to resist the status quo expectation that your spending “should” return to former levels. This doesn’t mean you can’t celebrate the new job or enjoy a few small additional luxuries. But, if you can consciously choose to maintain a lower level of spending, you will have a powerful tool to quickly rebuild. With the cash you’re saving, here’s a 6-item priority list to tackle:
1) If your emergency fund is completely depleted, rebuild a small buffer first (start with $1,000 to one month’s expenses). See my blog post on 10 ways to rebuild an emergency fund for ideas on this.
2) If debt has been accumulated, create the typical debt “snowball” program by paying off highest interest rate debt first. See my December 2008 newsletter for details on this strategy.
3) If you borrowed from retirement plans, be mindful of the plan’s rules for repayment to avoid a taxable distribution which could trigger taxes and penalties that would hurt your recovery efforts. These rules could trump the ideal strategy of paying back the highest interest debt first.
4) If you let critical insurance lapse, get your insurance back to the needed levels. This is also a good time to re-assess your insurance needs. It’s possible to be over-insured, and there may be some policies you let lapse that you’re better off without.
5) As the worst debt is eliminated, start adding to the emergency fund to get to 3-6 months’ expenses while paying off the last of the debt.
6) Update your retirement or other goal projections to determine what your contributions need to look like to make up for the lost time.
Once you’ve accomplished these 6 priorities, you will be well on your way to creating your desired financial future. You’ll probably be used to living on less by this point. And you’ll have created the freedom to choose when you’ll indulge in a splurge that you’ll really enjoy, as opposed to feeling trapped with a high level of fixed expenses.
If you have other ideas on financially recovering from unemployment, I’d love to hear them. Please feel free to contact me directly or post them as a comment to this article.
30-Second Financial Gut Check
August 26, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re like many Americans right now, you’re worried about your finances. Even if nothing has particularly changed for you in the past year – perhaps you still have the same job, same mortgage payment, same retirement accounts – you likely now have a gnawing sense of insecurity about what the future holds. And if something has changed for you – like loss of a job, a pay-cut, increased credit card interest rates, or a looming foreclosure – your worry level may be magnified by a factor 10 or more. Even though we’ve had a nice run in the stock market over the past 5 months and there is some encouraging economic data in the news, that sense of confidence that many felt just a year ago is nowhere to be found.
So, is your worry justified? I’m going to give you 5 quick questions to answer. It’s the 30-second financial gut check. If the gut check reveals that you have reason to worry, you can take the anxiety and use it to motivate yourself to take action. On the other hand, if it shows that you’re really doing ok, then you can use this gut check to start getting your confidence back.
- Are you spending less than you earn?
- Do you have an emergency fund equal to at least 3 months’ fixed expenses (6 months if you’re a highly compensated employee or in a volatile industry)?
- Do you regularly save for retirement or any other goals at the levels needed to fund them?
- Do you have zero debt or is your debt level going down?
- Have you taken steps to manage financial risks – either by avoiding the risk, saving the funds to cover the cost of potential losses, or purchasing insurance?
If you can answer yes to all of these 5 questions, you have great reason to start feeling more confident. You are taking the basic steps necessary to create a solid financial future. Great job! Now it’s time to focus on the next steps which are making sure your investments are working hard for you, that you’re not paying too much for products and services, that you’re optimizing tax-efficiency, and that your estate plan is in order.
If you can answer yes to 3 or 4 of them, you still have good reason to feel confident. Depending on the severity of the 1 or 2 issues that you said no to, you may be really close to mastering the financial basics. The key for you is to address the 1 or 2 issues as soon as possible.
If you answered no to 3 or more of the questions, it may be time to let your sense of anxiety be a motivator for you. There are some life transitions – for example, when you’re starting a new business, in career transition, or adjusting to the loss of a family member – that you may answer no to every single question. If the situation is temporary, especially if you’ve prepared the financial reserves to weather it, there’s no cause for concern. It’s when these situations extend themselves over years and become accepted as the status quo that alarm bells need to go off.
If you answered no to 3 or more questions and your situation is not temporary or prepared for, you have multiple warning signals that your financial situation is precarious. It’s time to take immediate steps to increase your income levels and/or reduce your expenses. You need to develop a plan to bring your financial life into balance. Many financially successful people have been in this situation and through creativity and hard work gotten themselves on the right track. It is attainable by coming up with a plan, making tough choices, and then working your plan. Good luck!
Free Financial Webinars
July 10, 2009 by Jean Keener, CRPC, CFDP · 3 Comments
The National Association of Personal Financial Advisors is starting a new series of free webinars on various financial topics including Money 101, Kids & Money, Investing Basics, Protecting What you Have, and more. These sessions are designed to provide a convenient, accessible way to get financial information to help you most effectively manage your finances. Each one is instructed by one of my fellow NAPFA members. The first session is August 7. For the full schedule and to RSVP, visit NAPFA’s website.
Should You Consolidate Student Loans Now?
July 8, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
If you have a federal Stafford Loan or PLUS Loan issued on or after July 1, 1998 and before July 1, 2006, consider yourself lucky. Beginning July 1, 2009, the interest rates on these variable-rate loans are set to drop to the lowest rates in the history of the federal student loan program. These new rates will be in effect through June 30, 2010, after which they will reset again.
Just how low are these rates? Well, starting July 1st, the new interest rate on Stafford Loans in repayment status is 2.48%, down from 4.21%; the new interest rate on in-school, grace period, or deferment status Stafford Loans is 1.88%, down from 3.61%; and the new interest rate on PLUS Loans is 3.28%, down from 5.01%. Remember, you are only entitled to these rates if you have a federal Stafford or PLUS Loan that was issued on or after July 1, 1998 and before July 1, 2006.
Consolidation
If you have more than one of these variable-rate federal student loans, you can convert your variable interest rate to a fixed interest rate by consolidating your loans under the federal government’s loan consolidation program. The interest rate on a consolidation loan is a fixed rate that’s equal to the weighted average of the current applicable interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a point (and capped at 8.25%). Lowering your interest rate can potentially save you hundreds or thousands of dollars over the life of the loan.
For example, suppose you have three separate variable rate Stafford Loans that you’re currently repaying. If you consolidate them, your new fixed interest rate for the life of the loan would be 2.5% (2.48% rounded up to the nearest 1/8th of a point). Let’s assume your balance is $20,000. Over the course of 10 years, your monthly payment on a $20,000 loan at 2.5% would be $189, and the total amount of interest you would pay over that 10 years would be $2,625. By contrast, if you had a $20,000 balance at a 6.8% interest rate (the current fixed rate for unsubsidized Stafford Loans), your monthly payment would be $230 and the total amount of interest you would pay over the life of the loan would be $7,619–a savings of $4,994 in interest. Over an extended 20-year repayment term, the savings would be even greater.
There are some things to keep in mind about loan consolidation:
- You can only consolidate your loans once, so if you did so previously, you can’t do so again
- You can’t add private student loans into a federal consolidation loan
- If you’re still in school, you can’t consolidate your loans until you graduate
If you are eligible to consolidate your loans, you’ll need to go through the Federal Direct Loan Consolidation program. For more information, visit www.loanconsolidation.ed.gov.
Loans issued on or after July 1, 2006
If you have a Stafford or PLUS Loan issued on or after July 1, 2006, you aren’t eligible for these new low rates. Instead, your loan will have a fixed interest rate for the life of the loan–the exact rate will depend on the type of loan you have. For unsubsidized Stafford Loans (”unsubsidized” means the federal government does not pay the interest while you are in school, during grace periods, or during deferment periods), the interest rate is 6.8%. For PLUS Loans, the interest rate is 8.5%. And for subsidized Stafford Loans (”subsidized” means the federal government does pay the interest while you are in school, during grace periods, and during deferment periods), the interest rates are as follows:
- 5.6% for loans first disbursed on or after July 1, 2009, and before July 1, 2010
- 4.5% for loans first disbursed on or after July 1, 2010, and before July 1, 2011
- 3.4% for loans first disbursed on or after July 1, 2011, and before July 1, 2012
Summary
The following table highlights the interest rates on different types of federal student loans.
| Stafford Loan: subsidized | Stafford Loan: unsubsidized | PLUS Loan | |
| Issued on or after July 1, 1998, and before July 1, 2006 |
|
same as subsidized Stafford Loan | 3.28% (down from 5.01%) |
| Issued on or after July 1, 2006 | 6.8% fixed |
|
8.5% fixed |
Keep an eye on your credit
June 29, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The Credit Card legislation passed last month should ultimately help consumers. However, in the short term, many people are being squeezed. We have a combination of factors:
- banks attempting to shore up their financial statements by reducing the available credit on credit cards, home equity lines of credit, and business credit lines
- credit card companies seizing the opportunity to raise rates and fees while they still can
- far fewer 0% and low-interest balance transfer offers available
What does this mean to you?
If you are carrying any consumer debt or rely on a line of credit for emergencies, you need to keep an eye on it. You need to read all your mail from lenders and especially watch for changes in your terms including interest rate changes, shortened grace periods, reduced credit limits, or increased fees.
If you’re carrying balances and your interest rates are going up, take action.
- Come up with a plan to pay off the debt as soon as possible.
- Investigate competitor’s offers.
- If you have cash in excess of your needed emergency funds, go ahead and pay off the balance now.
If you’re relying on a home equity line of credit for emergency funds and it’s reduced below what you need, take action.
Start accumulating a cash emergency fund immediately. Here are 10 tools to do this. Long-term, it doesn’t make sense to be at the whims of creditors for your financial security. Cash in hand is the only way to ensure you can handle the unexpected without doing long-term financial damage.
Bottom line, don’t just ignore changes in your credit terms. You need to be a conscious credit consumer. Your best best is to avoid credit card debt all together. But if you are carrying some revolving credit, take steps to ensure that current lending conditions don’t do permanent damage to your financial future.
New credit card law provisions
May 27, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The key provisions of the credit card law that Obama signed last Friday, May 22 are below. But first, my two cents …
I’ve heard a lot of talk about how these changes might make it more difficult to get credit and could result in higher fees in general and annual fees in particular for people who are using credit responsibly right now. It’s possible, but I tend to think that these issues were more a result of lobbying by the credit card companies than anything that will come to fruition. There will still be competition for credit card usage, and providers will need to make their cards attractive — especially to those that are the best credit risk. So while it may be harder to find cards with no annual fees, my guess is that a year from now there will still be options available to those with a solid credit history. We’ll have to wait and see, and in the meantime enjoy the increased communication and more reasonable policies from the credit card companies.
On May 22, 2009, President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the Credit CARD Act of 2009).
Amending the Truth in Lending Act, the Credit CARD Act of 2009 requires a creditor on an open end consumer credit plan (credit card) to notify a consumer in writing of any change in the annual percentage rate (APR) on the account at least 45 days prior to the change. The notification shall also inform the consumer of the right to cancel the account before the effective date of the rate increase. If the consumer cancels the account, this action shall not constitute a default on the account, and shall not trigger an obligation to repay the account in full.
Creditors are further prohibited from increasing the annual percentage rate (APR) applicable to an existing balance on an open end consumer credit card account unless specific conditions apply. The APR may be increased only if: (1) the index on which the rate is based changes, (2) it is a promotional rate that has expired, (3) a consumer fails to comply with a hardship workout plan, or (4) the account falls 60 days past due.
What’s more, if a rate increase is due to the consumer falling 60 days past due on the account, the creditor must inform the consumer that the rate increase will be terminated (and the rate restored to what it was before the increase) once the creditor receives the minimum payments due in a timely fashion for six months.
Other features of the Credit CARD Act of 2009 include:
- If different APRs apply to separate portions of an outstanding balance, the amount of any payment beyond the minimum payment due must be applied to that portion of the balance with the highest APR.
- Creditors are required to send statements to consumers at least 21 calendar days before the due date of the next payment.
- Creditors must provide on each billing statement a written disclosure indicating how many months it will take to repay the existing balance if only the minimum payment due is made each month, and what the total cost (principal and interest) of doing so will be. The disclosure must also indicate the total cost of repaying the existing balance due, including principal and interest costs, over 36 months.
- Payment due dates shall be the same day of each month. If the due date is a date when a creditor does not receive or accept payments by mail (e.g., weekends and holidays), the creditor must not treat a payment received on the next business date as a late payment.
- Creditors are prohibited from charging a consumer an over-the-limit fee unless the consumer authorizes the creditor to complete the transaction that causes the balance to go over the limit (opt-in). The creditor is further prohibited from imposing an over-the-limit fee in a subsequent billing cycle unless the consumer obtains an additional extension of credit in excess of the credit limit during that subsequent cycle.
- Extension of credit to consumers under age 21 is prohibited, unless the consumer demonstrates the independent means of repaying the debt or has a cosigner over 21 capable of repaying the debt. The creditor is required to obtain the approval of any cosigner to increase the credit line of an account for which the cosigner is jointly liable.
- Creditors are prohibited from charging a fee based on the manner in which a payment is made (e.g., on line, by telephone).
- Gift cards and certificates must disclose in writing on the card or certificate any dormancy or inactivity fee information, including the amount of the fee and how often it may be imposed (not more than once a month). What’s more, the issuers of such cards or certificates must inform the purchaser of these fees before the purchase. Such fees may not be imposed for the first 12 months after issuance. Such cards or certificates may not have an expiration date before five years after the card or certificate is issued.
The sections of the Credit CARD Act of 2009 about notification requirements concerning rate increases take effect 90 days after the date of enactment. The remaining portions of the Act take effect nine months after enactment.
April 2009 Newsletter
April 6, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
The April 2009 newsletter is now available online. It includes an update on market conditions, plus information on the Cobra subsidy, writing off worthless securities on your taxes, an estate planning pitfall to avoid, a conversation for parents about saving for retirement vs. college, and a how-to on budgeting. Click here to read the newsletter.
Free Financial Advice Bus Tour in D-FW
February 6, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
Mark your calendars for February 23 from 11:30 to 1:30. The national Your Money Bus tour will be making a stop at a place near and dear to my heart – Southlake Central Market. Local financial advisors, including me, will be there to answer your financial questions at no charge.
We’re all keenly aware of the economic challenges our country and many individuals are facing right now. An unstable economy, rising unemployment rates and home foreclosures continue to impact residents throughout our area.
To help individuals address these issues, we’ll be delivering complimentary financial advice from independent registered investment advisors along with free educational materials focusing on savings and debt reduction.
Central Market has generously agreed to host the bus, and will be providing space in their cooking school for the complimentary financial sessions. It will be a great opportunity to get your questions answered in a fun, upbeat atmosphere. Thanks to Central Market’s Community Relations Manager Ren Knight for arranging the stop!
The bus tour itself is presented by the National Association of Personal Financial Advisors Foundation, Kiplingers, and TD Ameritrade. The bus will also be making stops at UT Arlington and in Dallas. Here’s the full schedule:
9:00 am to 11:00 am – Free advice event at the Center for Continuing Education and Workforce Development at the University of Texas at Arlington (140 W. Mitchell Street, Arlington, TX). Bring your financial questions and get them answered by a financial advisor.
11:30 am to 1:30 pm – Free advice event at the Central Market Southlake (1425 E. Southlake Blvd, Southlake, TX). Bring your financial questions and get them answered by a financial advisor.
2:00 pm to 5:00 pm – Free advice event at the J Erik Jonsson Central Library (1515 Young Street, Dallas, TX). Bring your financial questions and get them answered by a financial advisor.
IOUSA on CNN this weekend
January 8, 2009 by Jean Keener, CRPC, CFDP · Leave a Comment
I just learned that IOUSA will be airing on CNN this weekend. I plan to set the DVR to make sure I get to watch it. It’s a documentary about America’s addiction to debt that’s received outstanding reviews. Here’s the info:
The public has spoken, and we’ve listened. In response to demand for information about our country’s financial challenges, CNN/U.S. will air the broadcast premiere of the acclaimed documentary I.O.U.S.A. on on Saturday, January 10 at 2:00 p.m. EST and on Sunday, January 11 at 3:00 p.m. EST. Accompanying the documentary will be an unscripted panel discussion with policy leaders about various economic solutions currently under consideration.
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This exclusive televised event will air only on CNN, and will be hosted by Ali Velshi and Christine Romans, co-anchors of CNN’s Your $$$$$, the network’s weekend business roundtable program. |
Throughout I.O.U.S.A.’s broadcast premiere, Velshi and Romans will engage a distinguished group of panelists, including Pete Peterson, Chairman of the Peter G. Peterson Foundation and former U.S. Commerce Secretary; Dave Walker, President and CEO of the Peter G. Peterson Foundation and former U.S. Comptroller General; Alice Rivlin, noted economist and former Director of the Office of Management and Budget; and Bill Bradley, a Managing Director of Allen & Company and former U.S. Senator and Democratic presidential candidate, in discussions about issues raised in the film and their ties to current economic events.
Learn more about the film at www.IOUSAtheMovie.com. And be sure to spread the word about the U.S. broadcast premiere!