TODAY’s financial team offers viewers advice on money matters ranging from preserving emergency funds to dealing with student loans — and they include several helpful links to help secure your financial future.
Q: We have no consumer debt or car loans, but we do have a big mortgage of $330,000 which is at a variable interest rate of 2.2 percent. We are wondering if, with an interest rate this low, if we should take some of the money we have been putting toward an emergency fund and use that to pay down more of the principal of our home. —Charmaine Wong, Markham, Ont.
Jean Chatzky: You need an emergency fund, no question, in an economy like this. And it needs to hold enough cash to cover six months of living expenses at the minimum. You don’t say how far along you are in building your emergency fund, but I’m going to assume you haven’t gotten there yet. If that’s the case, then I want you to continue putting money away until you do. Then, you can consider prepaying on that mortgage.
When your ARM payment falls, and you continue to send in the same amount each month, the extra goes directly toward the principal, and you can make some real progress knocking that down. That way, the next time your rate adjusts up, your monthly payment may be less than it would have been otherwise, because your loan balance has come down a bit.
But there may be a better use for that money. In your case, it’s the emergency fund right now. After that, it may be not against that 2.2 percent loan — which is costing you next to nothing after the tax deduction — but in investments in your retirement accounts, college funds and other places where the money could grow faster and beat that 1 percent and change return.
Lastly, keep your eye on mortgage rates. At some point, depending on how long you plan to stay in that house — and what the cap is on your ARM — it may make sense to lock into a 30- or 15-year fixed rate loan.
You’re probably saving hundreds of dollars a month with a mortgage this large. But the question you need to ask yourself is, “When will I erase those savings by holding onto this ARM for too long?” As rates go up, you lose your opportunity to lock in low. And so that’s the risk you’re running. If you don’t mind taking the risk for the prospect of capturing the savings, the onus is on YOU to keep very close tabs on the mortgage market so that you can lock into a new longer-term rate before those longer-term rates get too expensive.
Q: I lost my job last summer, and again two months ago. We used almost all of our savings during last summer’s job loss and now have no choice but to accumulate credit card debt until I get another job. We recently received our tax refunds and immediately put that money into savings instead of paying off our credit card debt. Should I have done this or should I have paid off my credit card debt? (At this point we are talking about less than $5K in debt, but it is accumulating at around $1,200 per month.) —Susie Morelli, Ann Arbor, Mich.
Sharon Epperson: This is a tough one, Susie. If you don't have an adequate emergency fund saved up — at least six to nine months of living expenses — you need to build that cushion. So it wasn't wrong to put your tax refund checks in that pot. But by racking up credit card debt, which is likely at pretty high rates, you're digging yourself into a hole and it will be difficult to climb out. Take half of the amount of your tax refund and put it toward paying down your debt. Do it all at once or take out enough each month to help you pay at least pay the minimum balance on those credit cards.
I don't know when you'll get your next job — soon, I hope — or how long you'll be able to keep a new job in this economic climate. In the meantime, you need to maintain good credit; that means making sure that you're putting enough money toward your credit card debt to keep those accounts in good standing. You don't want to overuse or abuse your credit cards, but you do want to be able to continue to have access to those accounts if you need it. At this point, you don't want to be in a situation where you have no income and no credit.
The bigger problem for you is going to be figuring out what you're going to have to give up. You have to cut expenses so that you're not relying on credit cards to cover $1,200 worth of bills each month. Housing is probably your largest expense. If you own, it may be tough to sell. If you rent, perhaps look for a smaller apartment. Make a list of your committed expenses and see what changes you can make in your lifestyle to reduce them. You may have to forgo nearly all discretionary expenses at this point — at least until you're working again. Finally, you may have to look not only at cutting back on spending but possibly selling some assets. It's time to make some drastic changes.
Q: I am a student about to graduate. I am with about $38K-plus in student loan debt. I need to know if there is any way I can possibly work with my debtor when I graduate, because the job market is not looking very promising upon graduation. I will be receiving a degree in finance and am worried it may take a while to land a job. —Joshua Chou
Sharon Epperson: There will likely be many students in your situation, Joshua, but you may be able to get a little breathing room on your federal loans. A new Income-Based Repayment plan, which goes into effect on July 1, will provide some relief to federal student loan borrowers. In most cases, your monthly loan payments will be capped at less than 10 percent of your gross income for 25 years; after that any remaining debt will be forgiven. To use this plan, you have to have enough debt relative to your income to qualify for a reduced payment. In your case, if you don't think you'll land a job right away and you have no income, you'll have no payment. You can use the calculator at www.ibrinfo.org to see if you qualify.
Sounds like great news, right? It's definitely going to help a lot of students who are facing grim prospects in the job market and borrowers who've been laid off and are out of work. Just remember, interest on your loans will continue to accrue, so your balance is still increasing. You'll have to pay the money back — eventually —and your balance at that time could be pretty steep.
You may also want to look into applying for "economic hardship deferment" if you qualify. You can defer payments for up to three years. Check out the Economic Hardship Deferment Calculator at www.finaid.org to see if you qualify and whether it works out for you, but the IBR will likely work for many more people.
If you decide do go into public service, you may be able to put off your loans even longer. If you're interested in using your finance skills to work in government, the nonprofit sector or as a teacher, you might qualify for "public service loan forgiveness," which will forgive any remaining debt on federal loans after 10 years of eligible employment and timely payment. You can use the IBR plan to keep your loan payments affordable until then. Get updates on the IBR and public service loan forgiveness plans at www.projectonstudentdebt.org.
Now, if you have private loans, getting lenders to work with you on those payments is going to be more challenging. First step is to know what you owe, who your lender is and your repayment status. Do you have a grace period? If so, how long? If you're not working by the time the first payment is due, you may be able to postpone your loan payments by calling your lender and requesting a forbearance. It's at the lender's discretion, and the lender may even require a fee. Forbearance will temporarily stop or reduce payments, but you'll still accrue interest. You just don't want to fall into the worst-case scenario where you default on your loans, so be proactive. Contact your lender before they contact you.
When you finally land a job, if it's not in the public sector and still doesn't pay enough for you to make your monthly payments, talk to your lender about an extended repayment plan and/or consolidating your loans. Go to loanconsolidation.ed.gov to find out more about consolidating federal student loans. Unfortunately, few lenders are consolidating private loans right now.
Q: My husband and I have lived a semi-frugal lifestyle and are at retirement age. I was forced into an early retirement at 54. My 401(k) and pension rolled into an IRA, which keeps getting lower and lower. My husband still works and will be 54 at the end of March. We are debt free and have two mortgages paid off. Our son and his wife are self-employed and would like to buy a $300,000 home but are not able to qualify for a loan. Even though they think they can keep up with monthly payments, we are afraid to co-sign their loan. What should we do? —Guler Banford
Carmen Wong Ulrich: Your gut is right — don’t co-sign. Your son and his wife will probably just need to rack up two solid years of tax returns (proving income) to qualify for a loan — and they should only get a home if they’re able to qualify in the first place! As long as they are both healthy and working, they have many more years to build a solid financial foundation, while you and your husband are working against time as you’re retired and he’s closer to retirement age. You may want to consider working part time to bring in more cash flow and even save more to make up a bit for your early-retirement losses, but what you definitely don’t need is another financial burden. It’s a money lesson they have to learn and they will one day be very grateful for going at it on their own … you’re doing them a favor.
Q: My husband and I took a loan out on his 401(k) last year to pay off bills and catch up. I have basically lost my income as a realtor and a hairstylist, and we have $700 in 401(k) repayments coming out of each of my husband's checks. We are two months behind on our mortgage, and I feel like giving up. Is there any way these investment companies will forgive the loan? —Marla
Carmen Wong Ulrich: Unfortunately, there is no loan forgiveness in 401(k)-land; however, as a last resort you can turn that loan into a withdrawal, losing up to 50 percent of your money and owing more in fees on top of it. I’d rather you lose the home and take care of your 401(k) (keeping it intact) as it sounds like you’re going to be unable to afford to keep the home on your income. Get help today — go to FinancialStability.gov and pull out the paperwork to see if you qualify for the president’s Housing Plan under the preventing foreclosure portion. You’ll need to work directly with your lender and file the paperwork listed on the site. Also, find a nonprofit housing counselor at HUD.gov or NFCC.org to work with you as an advocate. As you’re two months behind already, you’re heading into foreclosure territory, and time is of essence. But as you try to save your home, try to save your 401(k) as well. Why lose on both fronts?