another financial question

[marvella]

talking about finances online makes me a little nervous, but this place is such a great resource, i know soemone on here will have some good insight.

my boss and his wife make good money, as they are both professional and degreed. they have recently sought the advice of a financial planner, and now i am wondering if what they are doing will work for me too.

they were advised to refinance their home, to a 30 year fixed rate mortgage, pay off their outstanding car loans, etc. this would give them an extra $750 month in their budget, which would be placed in interest bearing accounts, CD's and the like, and increased whole life insurance policies.

the rational for this is- the bank is going to be using the payments you give them to make more money. they were told that they may as well keep that extra money and get the benefit of the interest themselves. they will also buy enough life isurance that would pay any outstanding mortgages and other debts, in the event of their death, so they won't leave a load of debt behind. it will also give them access to ready cash in case of emergencies or kids needing braces, etc.

does this make sense?

i am in the midst of getting a construction loan. if i follow this advice, i would ask for a 30 year fixed rate. i have a nice life insurance policy free where i work. for just a little more, i can have enough insurance that would pay all my debts and leave everything free and clear, and be able to add significantly to my savings.

i always thought that it's best to pay oneself out of debt as fast as possible. this advise goes contrary to that, but it makes tons of sense. supposedly, this is how people with money have even more money. a friend and i have have an ongiong discussion/disagreement over this.

what do y'all think?

the rational

[NCGirl]

I think the idea sucks but what do I know

[MorrisonCorner]

Basically they've been advised to pay off their higher interest debt with lower interest secured debt and to set up savings which would be easy to liquidate in the event of an emergency or pressing need.

Once those instruments (accounts) are fully funded a good financial planner would advise them to take additional risks on long term investments. But what works for them is based on how comfortable they are with risk and their personal financial picture, as well as their goals. So what works for them may well not be appropriate for you.

One of the worst things you can do is to chase other people's dreams because you thought it would be easy to take advice intended for them and apply it to your own life.

I'm not crazy about whole life policies for example: I think the fees vastly outweigh the service and security you get from them, cutting steeply into the rate of return. I do, however, have a term life policy on both myself and my husband, which someone looking at our lives might think is dumb... we have no kids, no debt, and a pretty solid bank account at this point. But I also have a pretty low tolerance for risk. So I have a policy out on my husband to protect me in case something happens to him, and a took out one for myself so he wouldn't have to make abrupt, financially driven, decisions in case something happened to me.

What you "should" do is highly personal. If you're uncomfortable with a mortgage no matter how "sensible" it might be to carry one... why would you subject yourself to all that stress? Even though it isn't financially "sensible" for us to carry term insurance, we carry it because the money I pay for it buys peace of mind.

Don't try and live someone else's life. If you need planning advice find a planner who doesn't have an ax to grind (Charles Schwab offers planning services, but some major companies offer it through their Human Resources departments) and get advice tailored to you, your situation, your risk tolerance, your ambitions, your desires. Anything less is a disappointment waiting to happen.

[jnap31]

I would get out of debt ASAP and stay out but that is just IMHO.

[NCGirl]

Also, if you go to a financial planner make sure he doesn't sell anything that he makes commision on. You pay him/her for his time only.

I think term life insurance can be a financially smart move. Whole life very rarely is except for perhaps the person selling it.

[Pink_Carnation]

It depends on whose "money sense" you are talking about. If you have high interest debt it can make sense rolling it into a lower intrest debt like a mortgage. If that isn't the case look at how much the bank gets out of a mortgage, for example on a $117,000 loan by the end they can get $254,000 with an apr of 6.025%. Do you want to have more money in the bank or not have the monthly payment?

Most choices can be right or wrong depending on what happens in the future. Inflation goes crazy and the mortgage payment is loose change or you loose your job and run out of money for the payments before you find work again.

Proverbs 22:7b "and the borrower is servant to the lender"
I consider this when looking at debt also, doesn't mean it has to be no debt always though.

[coalroadcabin]

Paying off high interest loans with a lower interest mortgage makes sense. Investing the $750 a month in CD's and MMA's (low risk but also a low return) really doesn't make sense to me, so I'm not sure why their FA suggested that.

[jersey girl]

I feel they would be better off to avoid a new mortgage, especially 30 years of it and work hard at paying off debt. They would be paying much more in interest than they would be earning, that makes no sense. If they really want to get ahead, they may consider downsizing or getting rid of a few toys.
Check out www.crown.org They have great advice, their tools section has lots of mortgage info with calculators. They also have volunteers that will help you for free.
Joanie

[mightybooboo]

I would never put my consumer debt on a 30 year mortgage.
They need to pay their bills,period.

IMHO

BooBoo<----Debt free.

[Terri]

It all depends on what your goals are. I have seen both approaches work.

My Aunt pretty much used your bosses approach. They are retired now and their house is NOT paid off. Apparently their retirement is large enough to cover the mortgage. They very much enjoyed the cash that they got from refinancing several times. As for the size of his retirement, I don't know what it was but he had a GOOD job!

My MIL has a paid for house, and an income of about $1200 a month from her pension and Social Security. Her only expenses are her utilities and her taxes of $1000 a year. That leaves her about $900 a month to do with as she pleases.

IF her house was not paid for, she would be a much poorer person today. In that area apartments are about $6oo a month, and then there would still be utilites as well. She would have about $400 a month for food and clothing and glasses and medicine and hearing aids (when she decides she needs them), and whatever else, instead of $900.

How big will your retirement be? Will you be able to take mortgage payments out of it? Will you have social security, because now the feds are saying that we might not?

From what I have seen, a paid for house is security if your retirement is only moderate. It can be the difference between having extra and just getting by.

Yes, if you are sure of a good retirement ANYWAYS you can safely play with the equity in your house, but as moderate-income folks I think that we will not. We will retire with a paid-for house.

[Michael W. Smith]

Okay, I can see paying off higher interest loans and putting on a lower interest loan. However, putting a car loan on a house loan only makes sense to me IF they pay it off ASAP. Their car loan was at a higher interest rate but for how many years? They have in essense financed their car for 30 years. Will this save them interest? I doubt it.

The extra $750.00 they have "saved" is also misleading. They have taken their short term loans and made them long term loans. While it is true the bank is making money from the money they have loaned you, it doesn't make sense to me to put into CD's and other interest bearing accounts! They might be paying 7.5% for their house loan and the bank might pay them 1% for savings account and 4% for CD's.

I would rather see them put the $750.00 towards paying off the mortgage.

Whole life insurance is a rip off. (I admit, I do have it, but I wasn't as smart as I am now.) If you need to get life insurance - get term!!!!!!

All financial planners don't give sound advice. You could take the same couple, put them in front of 10 different planners and get 10 different answers. And their financial plan certainly doesn't pertain to YOUR financial plan.

If you need a loan for construction, take out the ammount you need with as short of term as you can that won't pinch you.

Now, your boss's plan can work IF they are going to actually save that "extra" $750.00 / month. They might save some for a couple months and then start splurging on items they want or "need". And if they have paid off their credit cards with their mortgage loan, I certainly hope they don't start charging things again that they can't get paid off within a month.

Your idea of staying out of debt or getting out as soon as possible is correct. Don't let anyone else tell you otherwise!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

[jnap31]

Originally Posted by Michael W. Smith

Your idea of staying out of debt or getting out as soon as possible is correct. Don't let anyone else tell you otherwise!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

That sums it up.

[Cabin Fever]

Listen to M.W. Smith, he has good advice. I would not be surprised at all if your bosses financial adviser sells whole life insurance policies! The only reason that I would re-finance my home is to get a lower interest rate.

[shar]

If I Were You I Would Think Long And Hard About This. I Suggest That You Pick Up A Dave Ramsey Book And Read, Read , Read. I Think He Makes A Lot
Of Sense, Its A Path That I Am Using, But Thats Me. My Goal Is No Debt When We Retire, And I Wouldn't Even Think Of Taking On A 30 Yr. Mortgage.

Shar

[rambler]

In some situations what they have done makes sense.

Those conditions do not apply to you tho, & on the face of it it would seem to be a foolish move for you to try this plan.

As others say, it appears they had a lot of high intrest consumer debt - typically unsecured, short term, high intrest. They did the morally right thing of paying it off, by converting it to a long term, secured, lower intrest rate loan. It means, however, they are now at risk of losing their house if they can't pay for a 20 year old tank of gas, jewelry, night out, etc. This is a very real risk they took, and it is a bad situation, but they are following a good intention path with it.

A lending institution will _always_ charge more for a loan that what they will pay you to use your money. So it makes no sense to take a long term loan, and try to invest that money in safe CDs, savings, money markets. You are losing money along the way.

For that other couple, it is a good exersize for them to see their savings grow, and to have some safe money stored away to deal with their money issues. It is a way for them to start seeing the light. It is _not_ a way for them to make money. Yo would not make money either. This is a mind game type of thing, for them to see some results of changing their ways. It is not a money-making plan for them.

On the limited info, it sounds like a good plan for them in their situation; and a real poor plan for you in yours.

Now, if you can find some place that loans you a home loan for 5% fixed; and you can find a secured investment that will pay you 6.5% fixed intrest - then sure, good deal. Because of associated fees & income tax, you need to make about 1.5% return or you aren't keeping up with the costs & inflation.....)

But, you won't find that...... You will find fixed rate loans higher than that, & you will be hard pressed to find secure investments that pay over 5%. Any income savings you get from the loan will be eaten up by the income tax on the intrest you recieve, so no gain to you there.

Good plan for them.
Bad plan for you.

--->Paul

[PineRidge]

I agree with Michael Smith too! What happens in a year or two you want, or maybe really need a new car? Then you are paying two car loans, the new one and the "30 year" one as part of a mortage? If you did all of this refinancing would you be saving as much as them? What if you don't save but spend it?

Others have posted my thoughts while I type...

[mightybooboo]

Originally Posted by Michael W. Smith

Your idea of staying out of debt or getting out as soon as possible is correct. Don't let anyone else tell you otherwise!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I agree too,but the leveraging people wont,and that works for them too.
In my book,its security all the way when we are talking your home.

This stuff of refinancing here,buying securities,on and on....well that works just so long as you do too.I wont gamble anywhere but the casino,no one knows what the future holds work wise,economy wise or healthwise,or marriage wise.That debt will kill you if just one of those takes a dive.

BooBoo

[Jolly]

Originally Posted by marvella

talking about finances online makes me a little nervous, but this place is such a great resource, i know soemone on here will have some good insight.

my boss and his wife make good money, as they are both professional and degreed. they have recently sought the advice of a financial planner, and now i am wondering if what they are doing will work for me too.

they were advised to refinance their home, to a 30 year fixed rate mortgage, pay off their outstanding car loans, etc. this would give them an extra $750 month in their budget, which would be placed in interest bearing accounts, CD's and the like, and increased whole life insurance policies.

the rational for this is- the bank is going to be using the payments you give them to make more money. they were told that they may as well keep that extra money and get the benefit of the interest themselves. they will also buy enough life isurance that would pay any outstanding mortgages and other debts, in the event of their death, so they won't leave a load of debt behind. it will also give them access to ready cash in case of emergencies or kids needing braces, etc.

does this make sense?

i am in the midst of getting a construction loan. if i follow this advice, i would ask for a 30 year fixed rate. i have a nice life insurance policy free where i work. for just a little more, i can have enough insurance that would pay all my debts and leave everything free and clear, and be able to add significantly to my savings.

i always thought that it's best to pay oneself out of debt as fast as possible. this advise goes contrary to that, but it makes tons of sense. supposedly, this is how people with money have even more money. a friend and i have have an ongiong discussion/disagreement over this.

what do y'all think?

the rational

One of the smartest money guys I know worked for one of the major brokerage houses in New York. In fact, he readily admits that he was so smart, that he built up a portfolio worth over $2M from scratch, and then pretty much lost it.

Nowadays, he's a financial planner, and much more conservative.

He used to advocate much of what is written about above (with the exception of whole life) but has since quit. He finds that people pay off their high-interest accounts with the re-fi money, neglect to change their lifestyles, and just run up the same amount of high-interest debt all over again, leaving them in even worse shape.

[marvella]

lots of good input, y'all.

i am 52. my original plan was to pay it off as fast as possible before i retire, and then be able to enjoy the place. i do have retirement plan with the state job, hopefully SS too. but the reality is it will be a reduced income from what i have now.

there are some differences in our situations. i am 20 years older than this couple, and they have 2 small children. they are frugal folks, and don't have trouble saving. i save too, but it would sure be nice to know i was saving more. i said it wrong when i said whole life insurance, i did mean term. and yes, their financial planner sells insurance. his suggestion was that they take the entire 750 a month and buy more insurance. that is how he gets paid. they are not doing it, but are increasing the amount they have.

so thank you all so much. i should know that great deals are usually not great deals when you look real close. i would be a lot happier when i retire if i know it is paid for. i still might up my life insurance at work. the big draw of that would be to pay the place off when i die. i don't want to leave my family with a load of debt. i'd rather leave them a comfortable, functioning farm.

(ok PW my friend, you win.:-))

[clovis]

If I understand this right...

You are refinancing consumer debt on a 30 year mortgage, then investing that money into retirement.

Why finance a car that will be worn out in 5 years into a 30 year payment?

Why risk losing a house with a high payment (due to refi-ing consumer debt) ? A home is your security!!!!!

In essence, your boss is borrowing money from the bank to invest into retirement, the way I see it, and borrowing foolishly.

What happens if the economy goes south, and he can't find a job?

Check out daveramsey.com

clove