In this edition of Getting Personal, Chris and Tess talk about buying a house with cash, consolidating student loans, taking on new credit card debt and transfering a Roth IRA.
TEXT OF GETTING PERSONAL (FIRST SEGMENT)
Tess Vigeland: It’s time for Getting Personal when we answer your money questions and with me once again is our economics editor, Chris Farrell. Hello Chris.
Chris Farrell: How you doing, Tess?
Vigeland: Doing all right. So let’s go ahead and hit the phones. Our first caller is Joe and he is in Dearborn, Michigan. Hi Joe.
Joe: Hi Tess and Chris. My question is we’re in the process of buying a home and we have the option of paying for it by cash. You know, if I was buying this with a mortgage, the lender will, you know, make sure we’re doing things right, but if we’re doing this by cash, I’m wondering what we need to look out for. Does the title company do more or is it really the source of where we do things right?
Vigeland: Obviously Chris, when you do this the way most people do it and you get a mortgage through a bank, they’re going to insist on appraisals and title searches and all that sort of thing, so how do you do this without the bank’s help?
Farrell: The simplest way to do it is you hire a local real estate lawyer. It’s not going to be very expensive. They’ll make sure that you have all the paperwork that’s needed. Your administrative costs are going to be a lot less than what, Tess, you just rattled through — you know, a lot less paperwork. Usually, the seller is going to have their variety of representatives. That’s the first point and in this environment — in any environment frankly, but in this environment in particular — if you’re making an all-cash offer, you should have some real negotiating power because remember, you don’t have to get qualified. Your FICO score could be zero and with all cash, you just do that transaction, so you are an incredibly valuable buyer and it gives you negotiating power and hopefully you can use it.
Vigeland: Chris, what are some of the specific things that he’ll want to make sure that he does get done, again that a bank would usually make sure that you do?
Farrell: Well, you know, a number of things you want to make sure is there are no liens on the property. In other words, no one has, you know, you owe X-amount of dollars. You want to make sure that if there are any environmental laws that need to be fulfilled before it can be sold that that has been done. You want to setup yourselves in terms of your payment of your state and local property taxes. So you know, there’s a variety of things you’re going to go through, but can I just raise one other point here, Joe?
Joe: Sure.
Farrell: Not having a mortgage is a great thing, but again, I always want to give that cautionary note: You are tying up a fair amount of cash in one piece of property, one asset. Is that exactly the right thing for you to be doing at this time in your finances? If it is, terrific; go ahead and do it. But I just wanted to give that cautionary note that sometimes just for purely financial reasons, not psychological, it can make more sense to put a huge down payment down but still have a little bit of mortgage so you have access to that cash for other purposes.
Vigeland: All right; does that help answer your question?
Joe: You know, I figured there was a specialist involved and the real estate lawyer, that’s what I’ll be looking for.
Vigeland: OK, well, good luck.
Joe: Thank you.
Vigeland: Let’s reach into the e-mail bag and Shelley writes in from Kansas City, Missouri. Chris, her daughter recently graduated from pharmacy school and during her six years in college, the daughter borrowed $30,000 in loans. Now she wants to consolidate and as we know, there are issues with loan consolidation these days because of the credit crunch. Some of her loans are from Sallie Mae, some from the American Education Services, AES. The interest rate is about 9 percent. Now, she has been told that her credit is great but she has too much outstanding debt so she cannot consolidate. What’s going on here? Does she have any options?
Farrell: That’s not why she can’t consolidate. If you go back to July 2007 — last year — and you look at the stock market, the stock market is down 12 percent. If you look at an index of financial services stocks: down around 36 percent. If you look at Sallie Mae stock: down 59 percent.
Vigeland: Ouch.
Farrell: What is happening is because of financing troubles among the student loan lenders, a lot of them are pulling back from consolidation. If you go right to the Sallie Mae website, they’ll say, “We’re not doing consolidation loans right now.” And I do have a warning bell: I was looking around and looking around and you know, someone has got to be doing some consolidation loans and I did find one or two, but they were floating rate at 6.5 percent above LIBOR and there was kind of a teaser rate here and this is how people got in the trouble with the adjustable rate mortgages. There’s one other option though, Tess, and that is to go to the Federal Direct Consolidation Loan Center which you can get through the Department of Education and you might be able to qualify for a direct consolidation loan. This is you know… basically, you’re just working directly with the government. If she has a direct loan or if she has what’s called a Federal Family Education Loan, that FFEL that you see a lot of times, then she may be able to do some consolidation through the federal government through its direct loan program. My guess is the answer is no, but hey, it’s an option to pursue.
Vigeland: Well, thanks so much for writing in Shelley. We appreciate it and hope we answered your question.
TEXT OF GETTING PERSONAL (SECOND SEGMENT)
Vigeland: All right; we’re back with Getting Personal and Chris, let’s reach right into the e-mail bag and Harold writes in from Escanaba, Michigan and Harold has no credit card debt — Wow!
Farrell: Wonderful.
Vigeland: Good for him.
Farrell: Yep.
Vigeland: One of the card companies sent him an offer. This is new to me; I’ve never heard of credit card companies sending offers in the mail…
Farrell: Revolutions do happen.
Vigeland: Yes, they do. Anyway, he got an offer of zero percent APR with a 3 percent transfer fee, the zero percent good until next June. Now, he thinks this is a great way of borrowing cheap money. I can’t imagine that this is a great way to borrow cheap money — to go into credit card debt. What do you think?
Farrell: You know, it is a great way to borrow cheap money in one sense. You’re getting a zero percent rate of interest and Harold has no credit card debt, so obviously he’s pretty good about paying the bills. So if he did have some sort of purchase that would last for a brief period of time, not bad, but you’ve always got to read the fine print. It drives me crazy, by the way, because if you look at the fine print, there’s a lot of catches in there and the stuff is written by lawyers, not by ordinary human beings, so it’s hard to understand. But basically if you miss a payment, if you’re late on a payment, if the payment doesn’t arrive with the postmark at such and such a time before such and such a moment happens, all the sudden the rate kicks up and it maybe 9, 10, 15, 20, who knows what rate it is. So typically what they’re hoping: One, they want you to be a customer. Secondly, they’re really hoping that you miss one of those payments so then they can charge you a lot more than zero percent. So in general, if there’s something ahead of you and you need to you know use your credit card and you’re going to carry it for a month or two, there’s nothing wrong with doing zero percent. That’s fine, I mean obviously, but there is a catch. The catch is they’re hoping you’re late on a payment.
Vigeland: And we are really not in the habit of encouraging people who already have no credit card debt to go and get some.
Farrell: Exactly, that’s right. The times that you go into credit card debt might be, oh, you know, you’re taking a trip. You’re going to Europe and you put your hotels and your airfare on there and you carry it for a month or two because it does take you a month or two to pay it off. I mean, I can’t get upset about something like that. That’s fine and you use your credit card because that provides you certain protections if something goes wrong. But by and large, no, we are not in the habit of encouraging anyone to take on credit card debt.
Vigeland: Our next caller is Brian and he joins us from Auburn, Alabama. Hi Brian.
Brian: Hi Tess.
Vigeland: What’s your question for Chris today?
Brian: Well, I’ve been contributing to a Roth IRA account with a large brokerage firm for about five years and I’m concerned about the fee and I’m thinking opening of a new Roth with a retail brokerage that has lower fees.
Vigeland: Hmm.
Brian: I’m wondering if I’d be better off staying with a brokerage with a higher fee because I have compound interest built up there or if I’m better off switching to the brokerage with the lower fees?
Vigeland: What do you think Chris?
Farrell: Okay, you will capture your compound interest if you close the account and transfer it into your new Roth IRA, so you won’t be losing any of your compound interest. Now, you want to make sure it’s a, you know, we call it an institution to institution transfer. You just don’t want to hit by any tax penalty.
Brian: Right.
Farrell: And it’s very simple to do. It’s straightforward. You always contact the firm that you want to do business with first because they want your money and you say, “OK, I’m opening a Roth IRA and I want to be making this transfer. How do I do it? What forms do you need to be filled out?” They’ll have it on their website; they make it very simple. So you’ll capture all the compound interest that you have earned up to this five-year period and then you’ll put it into your new investment and here’s what you’re hoping is that you’ll continue to compound but you’ll do better over a longer period of time because you’ll be paying lower fees. And who knows what the future brings about, but lower fees, that’s something at least we can calculate.
Brian: Right, and that’s an institutional transfer?
Farrell: Right. The reason why we call it an institutional transfer is let’s say your money is with Chris Farrell, Inc. and I’ve been managing your Roth and you want to transfer it to Tess, Inc. because she’s got the low fee…
Vigeland: And better returns than Chris, Inc.
Farrell: And better returns, absolutely. OK, what you want to do is you don’t want to call me up and say close my account, send me the money and then I’ll send it to Tess. Uh-uh. What it is is that Tess contacts me and there’s all these forms that get signed and filled out, but then I transfer the money directly to Tess.
Brian: There’s no tax liability at all with the institutional transfer?
Vigeland: No, because you’re not really taking the money out.
Brian: Sure.
Farrell: The money is not actually touching your hands; that’s the key. So no, it’s routine, it’s standard, it has been set up this way so that you don’t have to pay taxes but you can decide “I don’t want to continue to work with this institution, I want to work with this institution” and you don’t have to pay a tax or early withdrawal penalty for making that decision.
Vigeland: Does that help you out?
Brian: That helps very much.
Vigeland: OK, thanks so much for the call.
Brian: Thank you. Bye.
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