THE PLAIN DEALER (PDF) by jennyyingdi


									    THE PLAIN DEALER                          MONDAY, AUGUST 14, 2006

                       Scott Snow, Managing Director, Scott Snow (financial advisors) LLC
                       Credentials: Certified Financial Planner, Certified Public Accountant, Certified Investment
                       Management Analyst
                       Experience: 13 years
                       Assets under management: $185 million

Question: I would like to downsize        In order to most effectively leverage the home
to a ranch or a condo (for health and
lifestyle reasons). I currently own my    equity that you’ve built, you will need to
home, and it’s appraised at around        prioritize your goals and understand their
120K. Most of the property I’ve con-
sidered is priced around $175-$200K.      financial implications, ensure that your financial
Initially, my plan was to use about
30% for the down payment, (around
                                          “house” is in order, and most importantly,
60K, the mortgage would be around         be honest with yourself.
$1,500.), I figure the closing cost
would be around $10,000 and I would       course greatly increases your               I first recommend selling your
put $10,000 in an emergency fund.         chances for both financial success          existing home. This should yield
I have a credit card balance of $9,000    and lifestyle enhancement.                  approximately $120,000.
(at 21.99% interest rate). I would
                                          In order to most effectively leverage       You also indicated putting down
like to pay off. I have an 11 year old
                                          the home equity that you’ve built,          30% of the purchase price or about
vehicle, which is becoming expensive
                                          you will need to prioritize your goals      $60,000. I would recommend trim-
to repair. With the remainder of the                                                  ming this back to 20% or $40,000 –
                                          and understand their financial
money, I wanted to buy, not finance                                                   this will give you increased financial
                                          implications, ensure that your finan-
another car. I want to know if this       cial “house” is in order, and most          flexibility and still offer the benefit
is a prudent plan, and how is the best    importantly, be honest with yourself.       of avoiding Private Mortgage
way to access the funds: home equity      This last part is critical and falling      Insurance (PMI) which can easily
loan, home equity line of credit, or      short can derail even the most              cost you $100 per month. Lowering
outright sale?                            well conceived plan. I suggest the          your down payment amount will
                                          following course of action:                 obviously increase your loan amount
Advice: First off, congratulations
                                                                                      and monthly obligation, however,
are in order for paying off your          PRIORITIZE YOUR GOALS AND
                                          UNDERSTAND THEIR FINANCIAL
                                                                                      you will lock into a historically low
current home mortgage.That is no                                                      mortgage rate and you can avoid
small feat and deserves to be recog-                                                  tapping into a home equity loan
                                          Based on your submission, it’s quite
nized. Next, it’s great to see that       clear that your number one goal is          at a higher rate down the road.
you are taking the time to develop a      to purchase a new home that will            In addition, the extra interest paid
plan for your next series of financial    offer an improved lifestyle. In order       on the loan is tax deductible which
moves. Mapping out a strategic            to fund this and your other goals,          translates into a nice tax benefit.
THE PLAIN DEALER                                                                       MONDAY, AUGUST 14, 2006

In terms of closing costs, the $10,000
                                                                                     YOUR PROPOSAL     RECOMMENDATION
amount you approximated seems
pretty steep. Remember, determining        Sell House                                      $120,000             $120,000
who pays these costs is negotiable         New Home Down Payment                            (60,000)             (40,000)
with the seller and you should aim         Closing Costs                                    (10,000)              (3,000)
to minimize this expense (under            Emergency Fund                                   (10,000)             (10,000)
$3,000 excluding real estate taxes         Pay-off Credit Card                               (9,000)              (9,000)
and insurance). This industry is           Remaining Amount (before auto)                    31,000               58,000
particularly cut-throat. Make sure         Purchase Auto                                    (31,000)      (20,000-25,000)
to have banks and mortgage brokers
                                           Net Remaining Amount                                  $0      $33,000-38,000
compete for your business and get
their offers in writing before the sale.
Next, your idea to funnel $10,000          final decision. In today’s ultra-         BE HONEST WITH YOURSELF
of the proceeds into an emergency          competitive new car market,               Finally, in order to fully realize the
fund is a crucial step in building         extremely low rates have become           benefits outlined in this recommen-
financial security. You will be better     a common incentive for buyers.            dation, the plan must actually be
prepared to deal with any curve balls      If a low rate can be secured (under       executed. Often times, this can be
life throws your way. Ideally, this                                                  a large stumbling block. Discipline
                                           3%) it will be more cost-effective
amount should cover 3-6 months                                                       is key. To protect against fretting
                                           to finance the purchase and sock
of living expenses.                                                                  away the significant “leftover”
                                           the remainder into a savings account
                                                                                     amount on frivolous items you must
Equally critical is your suggestion        where yields are becoming increas-
                                                                                     “know thyself ”. In other words, if
to retire your credit card balance,        ingly attractive (nearing 5%). This
                                                                                     you know that you are not a saver
especially considering you are paying      move will also boost your liquidity.
                                                                                     by nature and spend any “excess”
21.99% interest. Paying down this
                                           As you can see in the schedule            money you have on lattes and
balance is essentially like investing
                                           below, following my recommen-             French manicures, you may be
the $9,000 at a guaranteed rate of
                                           dations leaves some funds on the          better off committing the larger
21.99%. Guaranteed rates of that
                                           table. At this point, it would            down payment amount in order
magnitude don’t exist in the invest-
                                           be wise to revisit some other areas       to prevent it from slipping through
ment world. Also, in the meantime,
                                           of your financial picture.                your financial fingers.
while you’re waiting to sell your
house, you should transfer this bal-       MAKE SURE YOUR FINANCIAL
ance to a new card that offers a 0%        “HOUSE” IS IN ORDER
rate on balance transfers in order to      Do you have any other financial
avoid paying interest in the interim.      goals or objectives? Is your retirement
With the remaining amount, you             fully funded? If not, this would be
propose to pay $31,000 cash for an         a perfect opportunity to earmark a
automobile. After shopping around          portion of the proceeds towards one
for your desired make and model,           or more of these goals. Consider a
have the dealerships compete for           traditional or Roth IRA if you have
your business to save additional           earned income. Annual contribution
hard-earned dollars. Also, it would        limits for 2006 are currently set at
be shrewd to research the interest         $4,000 per year (5,000 if age 50 or
rates available before you make your       above) for both types.

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