FINANCIALconnection
Email your personal-finance questions to:
suze@costco.com.
Please include
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Ask Suze
Orman
Rebuilding credit
Also:
■ Risks of
rentals
■ Mortgage
payoffs
Suze will answer
selected questions in
this bimonthly column.
She regrets that
unpublished questions
cannot be answered
individually.
By Suze Orman
My husband and I had a second home, and
we could not keep up with the mortgage payments. We tried negotiating with the bank
without any success and stopped payment
on it in 2010. We have a primary home and a
line of credit that we have made timely payments on. We are also on time in our other
payments, like car loan and credit cards. How
much is our credit score affected by the loss
of our second home? And for how long?
Meg
California
THE MAXIMUM time that an outright foreclosure
affects a FICO credit score is seven years. But that
does not mean anyone who has a bad FICO score
due to a foreclosure will have a bad FICO score for
the entire seven years. During that seven-year period your score will begin to improve if you continue
to honor all your other debt obligations.
How much your score falls and how long it will
take to fully recover depends on what your FICO
score was before you stopped your mortgage payment. The better your FICO score was, the bigger the
impact. For example, in a study last year FICO
reported that someone with a fabulous FICO score of
780 or so who then ends up in short sale or foreclosure will see a drop of as much as 120 points and it
will take seven years to get back to that great score.
But someone with a starting FICO score of about 680
would likely see a drop of about 100 points or so and
it might take just three years to work back to that 680
score. But I want to be clear: 680 is in no way acceptable these days. You want to make it your goal to have
a FICO score of at least 720 and preferably 740. sco
Suze Orman’s TV
show airs Saturday
nights on CNBC. Suze
can be contacted at
www.suzeorman.com.
If you want to tap into the retirement account,
all the money you withdraw will be taxed as ordinary income in the year you withdraw it. If you
combine that with your pension income, you could
end up in the 28 percent federal tax bracket. You
would need to withdraw about $140,000 to end up
with the $98,000 lump sum after federal taxes you
want to use to pay off the loan. (Depending on your
state’s tax system, you could owe state tax on the
withdrawal as well.)
A better strategy would be to roll over your 457
plan into an IRA. There is no tax bill for this move.
Then consider investing in exchange-traded funds
(ETFs) that pay a dividend of 4 percent or so. ETFs
that focus on dividend-paying stocks or master limited partnerships are worth a look. If you were to earn
a 4 percent average yield, you would generate enough
income each year to cover your mortgage payment,
even after paying tax on the money you withdraw
from the IRA. Stocks are obviously more volatile than
a “safe” fund. But you have a guaranteed $5,300 pension payment every month, so that’s a lot of safety. If
you are comfortable with owning stocks, they can
generate plenty of income for you right now.
Of course, the absolute best way to generate
more cash flow is to reduce your spending.
BRIAN BOWEN SMITH
We have been retired for two years. My
husband gets a pension from the fire
department of about $5,300 a month.
We have a mortgage payment of $663 a
month on a 30-year loan. We owe $98,000
on our home. That is the only debt we
have. We are trying to create more cash
flow for each month. My husband has approximately $450,000 in his 457 deferred
compensation plan. Should we pay off our
mortgage from the 457 deferred comp or
buy a rental property?
m
-
e
I have a retirement income of $3,600 per
month. My home mortgage is $106,000, and
I am paying $900 per month (this includes
$100 over the required payment, which is
paying off my 15-year mortgage in 12½
years). I will be receiving $50,000 in a couple
of weeks in compensation for my father’s
death. Should this be applied to my mortgage or placed in a retirement account of
some sort?
Bob F.
New York
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“financial connection.”
Sandy S.
Florida
BUYING RENTAL real estate is never a good
idea if you absolutely, positively need that monthly
income. What happens if you have trouble renting
it out? Or if rental demand falls in your area?
i
WITHOUT ALL THE particulars of your loan I
can’t know for sure exactly how the math will work,
but based on some educated assumptions, if you
were to use the entire $50,000 to pay down the loan,
you would cut the payback period from 12-plus
years to six years or so. The only reason to not do
this is if you have other debts to settle, or if you lack
a solid emergency savings fund. You could use some
of the money for other important goals as well. For
example, you could put aside $10,000 or $15,000 to
boost your emergency savings, and the rest can go
toward the mortgage. And make sure that if you do
send in a big mortgage prepayment your loan servicer will credit all of it to reducing the principal
balance of the loan. C
