How can I sell my home in a bad market?
Many people took out interest-only loans on homes they can no longer afford and are having trouble selling because of the market. How can they sell their home before the burden becomes too much to bear?
Suze's advice may not be what every seller wants to hear. "You have got to lower the price of your house, depending, obviously, on where you happen to live. There are certain areas such as Seattle, it's still fine. But California, Arizona, certain other places, it is not fine," Suze says. "You have got to forget how much money you've made. You have got to—if you need to sell that house—lower the price of that house to whatever you possibly have to, to sell it."
So how is a negative amortized loan different from a fixed rate loan? "A regular mortgage payment is where you pay every month some of the principal, some interest, and hopefully it's over a 30-year period of time, could be shorter, where you have a fixed mortgage amount," Suze says. "So rather than the mortgage decreasing every year, negative amortization means your mortgage actually increases each year."
These loans are starting to cause homeowners headaches because many people didn't realize their payments would increase until it was too late. Lenders issued negative amortized loans to people who couldn't afford a regular mortgage payment. For example, if you can't pay $2,000 a month, the lender lets you pay $800 a month instead. "And they add the $1,200 that you should have been paying to the end of the mortgage," Suze says.
Those with negative amortized loans will see their payments adjust in the next few months, Suze says. "[For example], it's going to go from $1,500 to $3,000. It's going to go from $2,000 to $4,000. And their mortgage has been increasing as well," Suze says.
Even without interest-only loans, homeowners in some areas are having trouble paying a fixed rate mortgage. One audience member has a 30-year fixed rate loan but lives in Michigan, where the market has been hard-hit. She says she can barely afford her mortgage payment, and her house has been for sale for a year and a half.
"You're not going to be able to sell it for a while, I'm so sorry to say," Suze says. "Your state—in certain areas of your state—we're in trouble. There are a lot of layoffs. What makes a real estate market a good real estate market is when there are jobs to attract people. When there are no jobs to attract people, they have to leave."
Instead of selling her home, Suze suggests the woman either rent the home for the same price as her mortgage or take in a roommate. "You've made it this far. You have to have faith that you're going to make it a lot further," Suze says.
How can I refinance my adjustable rate mortgage (ARM)?
Linda has a question about another type of mortgage called an adjustable rate mortgage (ARM). An ARM's interest rate is linked to a financial index, and payments go up and down based on that index. "Three years ago I bought a condo here in Chicago and at the time I didn't have the resources for a down payment, so I did a hundred percent financing with two different mortgages," she says. "One is already floating, already adjusting, and the other one is set and won't start adjusting for another two years. I can afford the payments now, but what can I do to avert a financial disaster in the future?"
Because Linda has at least 10 percent equity—but not yet 20 percent—she's eligible for refinancing. "I want you to refinance the home immediately for a 30-year fixed rate mortgage," Suze says. "When you have less than 20 percent to put down, normally you have to pay something called PMI, private mortgage insurance. What I want you to do, however, is if you have at least 10 percent equity in the home, you can purchase your PMI up front. It is usually 1 percent of your mortgage amount."
Linda needs a mortgage for $180,000. "I think that's great. I do. It will cost you 1 percent, or $1,800, up front to get rid of PMI. You have now converted from an adjustable rate floating mortgage to a fixed rate mortgage," Suze says. "Your payments on $180,000 at today's interest rates are going to be about $1,100 a month."
What's the best way to pay down credit card debt?
Brandi and Jamal want to take control of their debt…they're just not sure where to start. "Last year we purchased a new home. So in doing that, we charged a lot of things," Jamal says. "When paying down credit card debt, would you recommend paying the card with the highest balance first or the card with the lowest interest rate first?"
Suze says to always pay down the card with the highest interest rate first. "I think one of the biggest mistakes people make is that they don't know how to pay down credit card debt and they pay the one with the biggest balance first," she says.
While they are paying down their debt, Suze wants Brandi and Jamal to check their FICO scores to see if they qualify for lower interest rates on their cards. "It is a three-digit number that determines the interest rates that you will pay on your credit cards, car loans and home mortgages. The higher your FICO score, the lower the interest rates," Suze says. "Your goal in this room is to have a FICO score of 760 or above. FICO scores run from 300 to 850."
Chances are your creditor already knows your FICO score. "They're checking it in the hopes you don't know so that they can charge you a higher interest rate than what you honestly deserve," she says. "They're not going to tell you [that] you can get another credit card at 4 percent interest if you're paying 18. They make their money off of you being ignorant."
Your FICO score can also affect your car insurance rates. "There is a derivative of a FICO score figure the exact same way known as your insurance risk score that determines what your car insurance premium is," she says. "So if you have a low FICO score, you have a low insurance risk score. If you have a low insurance risk score, you're paying 50 percent or so more on your car insurance premiums."
Another thing to remember about paying down your credit cards? Don't pay any of your cards late. Your FICO score decreases when you make a late payment, which means you could be in for a rude awakening. "Let's say you have five credit cards. You're in good standing with them all. And you're late on [one] credit card," Suze says. "Guess what? These other four have the right to do what's called universal default and take you up to the default [interest] rate on all your credit cards, which could be as high as 23, 27, 30 percent."
Under federal law, every person is allowed one free credit report every 12 months for each of the three major credit bureaus. But be careful—checking your credit score more often than what's recommended can actually hurt your score. To get your free report, go to the website set up by the Federal Trade Commission, www.annualcreditreport.com or call toll-free: 877-322-8228.
What is the best way to fix a credit report?
In July 2007, audience member Linda will have paid off about $50,000 in credit card debt in only two years! "But the bad credit still follows me and I still get calls because I'm on a credit report with someone else," she says. "So how do I fix that?"
If you have a negative but accurate history, Suze says it will stay on your credit report for seven years. "If, however, there is information on your credit report that is not accurate, then you have to take an active role in contacting the three credit bureaus and stay on them to get it removed," Suze says. "Because even after you've gotten it removed, it will reappear again a few months later. You just have to stay on it."
If you notice a mistake on your credit report, you should contact the three credit-reporting agencies:
- Equifax: 888-766-0008 or www.equifax.com
- Experian: 888-397-3742 or www.experian.com
- TransUnion: 800-680-7289 or www.transunion.com
Here's the good news for Linda. "Anybody who can get themselves out of $50,000 in credit card debt in two years can handle these credit bureaus easily," Suze says.
How can I pay down debt and save when I live paycheck to paycheck?
One woman in the audience owns a house, has a second mortgage and credit card debt, but she's starting to think about her future. "I'm 29 years old and I want to start saving," she says. "How can I save when I live paycheck to paycheck?"
The interest rate on her credit card is 20 percent. "I can guarantee you a way to make a 20 percent return on your money, hands down," Suze says. "Pay off your credit card debt."
She can start by looking at her FICO score. "You can get a high FICO store," Suze says. "You can do a balance transfer from 20 percent hopefully down to 6. When you can start making more out of less money by paying less in interest, you then have more money to save for your future."
But Suze doesn't want her to become so focused on the future that she forgets about the present. "Your present is now determined on what you did in your past, and what you did in your past was you spent money you didn't have and now you're paying the price," she says. "It doesn't matter because you're young. You have time on your side. And as long as you are just willing to be a warrior and not turn your back on that financial battlefield, you will be so okay, I can't even tell you. So don't feel bad about it. Just learn from what you did."
Has Suze ever made a financial mistake?
Suze says, "When I talk to you about credit card debt and not having money to do anything, it's because I was you."
In 1987 Suze says she was a financial advisor, making a large amount of money and spending it just as fast. When circumstances changed and she didn't have the same amount of income, she says she continued spending $25,000 a month. "Before I knew it I was $250,000 in credit card debt. And there I was, Suze Orman, sitting in a Denny's in 1990 knowing that the waitress had more money than I did. I had my fancy leased BMW, my fancy Rolex watch," she says. "And I didn't have a pot to pee in. I was the biggest financial liar out there."
Suze says she knew there was only one way to change things. "I told everybody the truth and my life turned around on the spot," she says. "I don't tell you these things because I am preaching to you. I tell you these things because I am you."
Should I move money from a 401(k) to a Roth IRA?
An audience member planning for retirement wants to know if her money is better off in a Roth IRA or a 401(k) account.
Suze says, "If your 401(k) matches your contribution, I want you to contribute up to the point of the match then stop contributing after that, because if you qualify for a Roth IRA, in my opinion, you're far better off having a Roth IRA and a 401(k)."
Though they're both intended for retirement, Suze says it's a good idea to have both a Roth IRA and a 401(k). "As you get older and you're going to want to diversify," she says, "I'm going to want you to buy individual bonds, which you can do in your Roth account, [and] which you cannot do in a 401(k)."
When you have money in an old employer's 401(k), is it better to roll that money over to your new employer's plan? Actually, Suze says it's better to put that money into a traditional IRA, and then convert that from a traditional IRA to a Roth IRA.
Current rules make this conversion difficult. No matter if you're married or single, those with adjusted gross incomes over $100,000 cannot convert money from a traditional IRA into a Roth IRA. But in 2010 those rules will change. "Starting in the year 2010, no matter what your income, you can convert to a Roth IRA," Suze says.
When can I use my Roth IRA?
Another audience member has a retirement savings question for Suze. "I'd like to know, when can I use my Roth IRA?"
Suze says the rules of the Roth IRA indicate that you can take money out of it—tax-free—anytime after you reach the age of 59 1/2. "You need some extra money? You want some money? Girlfriend, enjoy it," Suze says. "Take it out."
Is it okay to borrow from my 401(k)?
This inquiring audience member wants to know: "Is it okay to borrow from your 401(k)?"
"The biggest mistake you will ever make with your 401(k) plan is if you borrow from it," Suze says. "Never, ever, ever take a loan from your 401(k) plan."
Suze says when you put money in a 401(k), it goes in with pre-tax dollars—you add from your wages before the government takes any income tax out.
When you take a loan out of your 401(k), you'll usually have to pay it back in five years—with other money that has been taxed. Then, when you get older and you take money out of your 401(k) plan again, you'll pay taxes again. "You have just volunteered for double taxation. Why would you want to do that?" Suze says. "Do not ever take a loan from a 401(k) plan."
What should she do to plan for the future?
An audience member's daughter has just graduated college—with no student loans and no credit card debt! "She started her new job this week. So what should she do to plan for the future?" she asks.
Suze has a very quick financial plan for her daughter and others in the same situation.
- Establish a six-to-eight month emergency fund. "That way if something happens, she has a place to go and get money."
- If her employer offers a 401(k) or 403(b) plan with matching funds, she should put as much as she can to maximize her employer's match. "I don't care what else is going on in her life, she cannot afford to pass up that free money. But she is only to contribute up to the point of the match."
- After that, start saving for a down payment on a house. "Nothing will give her a better tax write-off and future security than owning a home she can call her own. Even in these real estate times, if you are a buyer, there are tremendous values out there. If you do it correctly, you will be so happy you did years from now."
- Then put money in a Roth IRA. "The absolute best place to save for your future. Even better than a 401(k) plan."
"If she can just do that, you're going to be one happy mama," Suze says.
How do I know if my nest egg is big enough?
Eileen is looking toward her financial future. "What formula do you use to know if the nest egg that you have is enough for retirement?" she asks.
The formula is simple, Suze says. Add the interest income that nest egg will generate to Social Security and any other investments. "If that's enough to pay your bills, you've got enough," Suze says. "If it's not, it's not."
What are the most important things a woman needs to know about investing?
Virginia has been listening to all of Suze's advice, but still wants to know what the most important things a woman needs to know about investing in her future. "How do we get that knowledge?" she asks.
"Number one, never talk yourself into trusting anyone. You are to trust yourself more than you trust others," Suze says. "The biggest mistake women make is that they do say yes out of fear."
If you trust a financial adviser more than you trust yourself, Suze says you are making a mistake. "If you want to find the best financial adviser in the world—I have said this forever—look in the mirror. Nobody is ever going to care about your money more than you do."
Many women have been conditioned to not trust themselves when it comes to money, but Suze says you can build that trust in yourself by reading and slowly becoming more involved in your finances. "If you have what it takes to be able to raise children, you, my dear friend, have what it takes to do anything you want day by day. Do it slowly and you'll get there."
Suze says the worst mistake people make, especially when they're just starting out, is being "all or nothing investors." Instead of jumping into investing all your money in no load mutual funds or individual stocks, start with a smaller sum, like $500.
"When you don't know what to do when it comes to money, it's better to do nothing than to do something you do not understand," Suze says. Read an excerpt of Suze Orman's Women & Money .
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