Money tips
Home-equity loans and lines of credit are still a popular way for homeowners with a mortgage to borrow. The interest is much lower than on other forms of consumer borrowing and, generally, the interest you pay on loans up to $100,000 is tax deductible.
In the past few years, with housing prices soaring nationwide and short-term interest rates at or near record lows, many Americans have used the equity in their homes to finance home improvements or college tuition or to pay off high-interest debt.
But times are changing. Interest rates on short-term home-equity lines of credit have spiked even as the housing market is slowing, which means homeowners will have less of a cushion to fall back on should they be unable to repay borrowed money. Check current rates.
A home-equity line of credit charging 4 percent two years ago is now more than 7.5 percent and is expected to hit 8 percent by the summer, says Greg McBride, a senior analyst at Bankrate.com, which tracks loans. That’s because a line of credit, the most popular way to borrow against home equity, is a variable-rate loan and rates have gone up as the Federal Reserve has made its hikes.
“It’s decidedly less attractive now,” McBride says of home-equity borrowing.
Still, home-equity loans and lines of credit are often the most attractive option for homeowners looking to borrow, and traditional cash-out refinancing of first mortgages has fallen out of fashion since rates began to rise.
If you’re thinking about a home-equity loan, consider when you will need the money and how soon you will be able to repay it. Rising interest rates favor the fixed-rate terms of home-equity loans (now about 7.8 percent), but lines of credit may still be better for incremental expenditures like college since you pay interest only on the outstanding balance.
Avoid offers to lend you more than 100 percent of your home equity. Interest on the loan above the equity is not tax deductible and you’ll have even less recourse if you run into money trouble.
Parenting
CHOOSING A GUARDIAN FOR YOUR CHILDREN: It’s highly unlikely that you will ever need it, but no decision is more important or difficult than choosing a guardian for your minor children in the event both you and your spouse should die.
The choice generally has to be made in a will, so if you don’t have one, find an attorney and write a will.
Picking a guardian comes down to finding someone you trust and who will accept the job. Don’t spring the decision on a friend or relative because they can decline the responsibility after you’re gone. Common choices for guardians are uncles and aunts, family friends or even grandparents.
“Plan Your Estate,” from the Nolo series of do-it-yourself legal books, recommends naming an individual, even if that person is part of a couple, in case they later split. But Fred Sanders, a partner in the law firm of Morea Schwartz in New York, who specializes in estates and taxes, says the chances of a problem are remote and most clients name couples to steward their children if they die.
Once you’ve decided who will raise your children, you need to transfer sufficient assets from your estate to aid in their upbringing and select someone to oversee that money.
The Nolo book says you should generally choose the same person to look after your children and their funds. Sanders counters that 60 percent of his clients pick someone else to watch after the money, even though that creates the potential for conflict between the two parties.
As a trustee, his clients typically designate a friend who is a lawyer, banker or other professional with relevant experience, or name their family attorney, accountant or a bank. The thinking is that a couple who may make great substitute parents may also make poor money managers.
Remember to designate alternates for both guardians and fiduciaries in case they’re not up to the task.
You can give your property and money to your kids outright under the Uniform Gifts to Minors Act, but a trust is a better idea, says Sanders. It will cut down on court and administrator’s costs, and you can keep your money out of your children’s hands longer if you feel they may not be ready to handle a large sum when they reach majority, at 18 or 21, depending on the state.
Retirement savings
ROTH 401(K)S COULD CATCH ON: Someday soon you may notice a new retirement savings plan being offered by your employer: a Roth 401(k). Enacted by law in 2001 but available to companies only since the start of 2006, the new retirement accounts blend the popular features of Roth IRAs and the common 401(k) plans many companies offer.
Traditional and Roth IRAs are mirror opposites: You deduct contributions to the traditional IRAs from your taxable income now and pay taxes on your withdrawals in retirement, while contributions to a Roth IRA are taxed when you make them but withdrawals in retirement are tax free.
The case is similar for the traditional and Roth 401(k) plans, but with a few key differences.
As with IRAs, you want a traditional 401(k) if you expect to be in a lower tax bracket when you retire and a Roth 401(k) if you expect to be in a higher tax bracket.
“It makes a lot of sense particularly if you’re younger and not at your peak earning years,” said Tom Ochsenschlager, vice president for taxation at the American Institute of Certified Public Accounts. “A high-income individual might want to think twice about enrolling in a Roth 401(k).”
Unlike the Roth IRA, the Roth 401(k) does not disqualify high-income participants so it will be an option for many more people. But you will have to start making annual minimum withdrawals once you reach 701/2 years old, which the Roth IRA does not require.
Still, many of the inheritance benefits of the Roth IRA apply to the 401(k) version and your employer can match a percentage of your contributions just as with traditional 401(k)s.
The Roth 401(k) is new, so companies may take a while to sign up, but there’s a good chance the plans will catch on, said Ochsenschlager.
The Internal Revenue Service recently cleared up some confusing regulations and, since most people believe taxes will rise in the future (they’re at historic lows now), they will likely prove popular with employees.
Of course, Congress scheduled the Roth 401(k) to “sunset” in 2010, so unless it is extended, you’ll have to get in while the getting is good.
Student loans
LOWER INTEREST FOR GOOD GRADES: Here’s a new twist on college aid: a student loan with a lower interest rate based on your academic standing.
MyRichUncle, a private student loan originator, has been experimenting with rate discounts of 0.25 to 0.75 percent for borrowers who submit information similar to what you would find on a college application such as grades, area of study and academic institution.
The company insists that this isn’t charity; it simply wants to change how students are approved for nongovernment-backed loans from the traditional credit-worthiness criteria that often require parents of students with no credit history to co-sign loans to what it believes is a more sensible, and fiscally accurate, method.
“What we’re really doing is measuring the capacity to take on debt,” said company president Raza Khan. “Students who tend to do well in school tend to be more likely to repay their loans and so, from our perspective, should be rewarded with a lower interest rate.”
Feedback, both from borrowers and those who underwrite the loans, has been positive, he says.
Any borrower who submits the extra academic information on top of the typical credit background receives 0.25 percent off their rate, with some outstanding students receiving a cut of as much as 0.75 percent. College juniors with good grades studying a subject in great demand are more likely to receive a bigger discount than high school seniors.
The company started the merit discount eight months ago and although it is small for now, Khan says MyRichUncle wants to offer deeper discounts based on academics in the future. He hopes that eventually academic criteria would just become part of the regular loan application process and so would rates based on those good grades.
According to Bankrate.com, the company’s average interest rate on an undergraduate student loan is currently around 6.38 percent, several points less than some competitors.
www.mercurynews.com
