Financial Planning for Generation X & Y Women
 
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Expert Q&A Archive

07/31/2006
Real Estate and Retirement Planning
"Where can I go to get more information about whether it's better to prepay my mortgage, get a home equity loan to fix my house and increase its value for possible selling and trading up, or just max out totally on my Roth and my TSP?"
Alyssa Rakovich:
expert info »
Be careful about home equity lines of credit if you are planning to sell - usually there is a penalty fee or charges assessed if you close a home equity line of credit before the terms of the equity line usually 3-5 years - 1st defer income in TSP up to the maximum to receive your full match - if you need to defer income or have income tax issues continue to max out on your TSP - if you want more control over your investment options invest the money in your Roth - It is always a good idea if you have extra cash flow to pay down on your mortgage - get your mortgage lender to run you an analysis of what happens if you make prepayments - ie they can illustrate the years and estimated payments depending on how much extra you pre pay - if you make one extra payment per year - if you make that payment a little each month or if you make it in a lump sum in the begining of the year.
Ellen Hoffman:
expert info »
This really is a complicated question. To answer it well, you need to be clear about your financial status, how many years you have before retirement, and the type of lifestyle you have in mind for your retirement. The issue of whether you have decided you definitely want to move (or not) is a big one.

To come up with the best strategy, it would probably be best to have a session or two with a financial planner who can look at your entire financial picture and project the longer-term implications of each decision. You can search for a financial planner in your area by going to:
( http://www.napfa.org/consumer/planners/ ) the National Association of Personal Financial Planners. Members of this group do not charge commissions for selling products. This website, which belongs to the organization overseeing ethics of the profession, contains info on what questions to ask a planner before you commit to working with him or her. ( http://www.cfp.net/learn/knowledgebase.asp?id=6 ) Another source may be the Garrett Financial Planning Network, whose members specialize in working with people who are not necessarily super-wealthy. ( http://www.garrettplanningnetwork.com/pages/splash/index.htm. )

One more suggestion: I recommend discussing the issue of whether you should fix up your house and "increase its value" with at least a couple of people who are very knowledgeable about the local real estate market. Although you may enjoy the benefits, not every "improvement" to your house necessarily increases its value. An agent should be able to give some guidance on that. Also, you should get a good fix on what is happening in your local market, because as the headlines are saying this week, there's a glut of houses right now and probably will be for a while.

I hope this is helpful.
Gail V. Marquet:
expert info »
There's no set response to this question. There are a lot of variables. If the individual is planning on staying in the house over 5 years, I would suggest prepaying on the mortgage. If they have sufficient equity in the house and want to trade up, a small home equity loan to make repairs might be an option. However, they need to remember the loan will come out of the proceeds of the house in addition to what they owe on the first mortgage.

About the Retirement plans - the rule of thumb is to save 15% of your income in these plans annually.
Delores Lenzy - Jones, CPA, CIA:
expert info »
You can obtain virtually any information via the internet. Would suggest reviewing several sources on a particular topic. Prepaying your mortgage will eliminate the interest deduction, equity loan will provide an interest expense deduction and Roth IRA will provide tax deferment. It really depends on your financial goals and position.
Barbara Babcock:
expert info »
Check out the calculators on bankrate.com
Elizabeth Goldsmith:
expert info »
Surprising number of free or very low cost publications from www.pueblo.gsa.gov The Consumer Information Catalog from GSA Federal Citizen Information Center.
Jeff Kyle:
expert info »
Well, if you pay off your mortgage, there goes one of your best tax deductions. It always makes sense to do as much tax deferred (TSA) savings & possibly tax-free (Roth) savings as possible. If at all possible, make maximum contributions to those savings plans. Why would you have to prepay your mortgage in order to get a home equity loan? I’m assuming that you can make increased mortgage payments with the home equity loan and then again if you “trade up” to a more expensive home. If you are asking which is a better use of your money, either to make monthly payments on a monthly home equity loan so you can trade up to a more expensive home and put yourself in greater debt or to put your money into IRA’s & TSA’s, both in which you earn interest instead of paying interest (home equity loan), my vote is for earning interest! The decisions you need to make here really come down to, what is it you’re trying to ultimately accomplish? Which in the past 2 e-mails, really only you still know the answer to that question.

The two choices below actually accomplish two different things and are two completely different ways of utilizing your disposable income. You may consider (if you can afford the payments & if it makes sense after looking at your financial, insurance, tax & estate planning situation) utilizing the equity management strategy as written about in Missed Fortune 101 by Douglas Andrew. This is a strategy where, if appropriate, you can access the equity in your home and reposition those assets into fully insured, guaranteed, tax-deferred savings and earn more than your loan interest rate on equity that you were earning 0% interest before, you get the extreme power of compounding and the tax write off of the loan. So maybe this answers your question & maybe it doesn’t. If not, then you’ll need to explain more & in greater detail for me to responsibly speak to a couple of sentences in an e-mail. Thanks for your question.

PS: Please be advised that everything financial has a tax implication and an estate planning implication & that you should be seeking advice from a CPA & Financial Services professional who has a deep knowledge & understanding of estate planning.
Elizabeth Rusnak:
expert info »
The answer to this question depends on how far away from retirement you are. Please provide more information.
 

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