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THE PLAIN DEALER MONDAY, AUGUST 14, 2006 ASKTHEEXPERT 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 IMPLICATIONS 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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