What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
2. Bankruptcy or not?
3. Downsize or not?
4. Praying for money
5. Figuring out down payment
6. How much for extra payments?
7. Distant family
8. Dream beach house?
9. Combining credit card problems
10. Simple game for couples
A surprising number of you have written to me asking for updates on the novel I’m working on. The first draft of it is about 60% complete. I have a detailed plot outline done and maybe 30% of the writing finished.
Once it’s done, I will let it sit for a few weeks without looking at it, then I’ll edit it myself. After that, I’m going to pass it on to several editors to polish it up.
I’m really happy with it. It’s fairly light reading, I think – nothing incredibly deep or complex, but lots of fun.
I’ve noticed a few times that you mention “tossing” items such as unread magazines after you browse through them. Just wondering if you recycle paper or other items – I think it would be great if you would mention recycling instead of just “tossing” when you refer to throwing things away.
The relatively rural area where we live does not offer any sort of recycling program. In order to recycle materials, we have to take them to a center in another town.
We tend to re-use magazines, though. They become fodder for children’s art projects, wrapping paper, and, since we go camping a lot in the summer, they often become an abundance of firestarters. They get “tossed” into a magazine box, usually, and are then harvested for these types of uses.
We do save all of our extra boxes, flatten them, and take all of them and any extra magazines over to the recycling center about once every two months or so.
Q2: Bankruptcy or not?
The short version of my story is that I am 26 with about $35K in debt ($18K in student loans, the rest is credit cards, medical bills, and car loans). After being unemployed for almost a year, I got a job a few months ago paying $30K, but living in DC, it’s a miracle I can provide for myself and my child, and there is nothing left over to pay down the debt. I make about $1800/month after taxes: I pay $1000 for my apartment, $300 for groceries, $200 for transportation expenses, $50 for my cell phone, $50 for internet, (both of which I need for work) and $100 towards my student loans. I’m really worried my creditors will come after me now that I am employed again and I won’t be able to make ends meet if I get a judgement against me. I have no assets- no car, no savings, no retirement accounts, and having a small child means I can’t get a second job. My parents gave me money to pay basic expenses while I was unemployed and are willing to lend me the money for a bankruptcy attorney if it will help, but they are unable to help more than that. My question is, should I file bankruptcy to get rid of the non-student loan debt?
The biggest downside to bankruptcy is that it severely hurts your credit for the next seven to ten years.
This can affect everything from your potential job hires to your insurance rates, though your bankruptcy is far from the only factor there. It also severely disrupts your potential to get loans during that period.
If those issues are relatively minor to you, I would consider talking to a bankruptcy lawyer. You have a child, and if you have more bills than you can afford to pay by any reasonable standard, bankruptcy is probably the best route for you.
Q3: Downsize or not?
I’ve reached an impasse as to whether I should sell my house and downsize to a smaller living space. I currently pay $1,300 PITI a monthly with an FHA mortgage of $146,000. My net income is about $3,200/month as a contractor in work I enjoy. I’ll probably be working on this contract into next year. I pay over $600/month for health insurance. I attend grad school part-time and will have about $21,000 in student loans to pay off in 2014. I have about $12,500 in credit card debt and I am working hard to pay it off–paying at least $500/month most months.
So the burning question is: should I sell my house? On the market, it would ultimately sell in the $190s, and I would guess it would take maybe six months to sell. But in order to sell, I estimate that it would take at least $5,000 worth of work (mostly new paint, carpet, and fencing). I like my neighborhood. But I’m a single person (I got the house in a divorce two years ago), and the house is a lot to take care of.
Should I stay and continue to build equity in the house and possibly refinance (which also costs money). Or should I cut my losses and make plans to sell?
If you’re struggling to care for the house, then the best solution is to downsize.
You need to also remember that it’s not just the time invested in caring for the house, but you’re also paying property taxes on it and you’re also paying inflated energy bills for it. Those have a significant negative impact on your financial state – and the time spent caring for the house is a drain, too.
If I were you, I’d invest my extra money into getting the house ready to sell, then put it on the market.
Q4: Praying for money
We are in a world of financial hurt. I don’t want to talk about numbers, but we barely can keep up with our minimum payments. My wife won’t face them with me. Her solution is to pray all the time for money to solve our problems. She goes to church several times a week and prays a few times a day for money. What can I do to get her to address our problems directly?
While prayer is a powerful mechanism, particularly for one’s spiritual sense of balance, it’s often not the answer all by itself.
My view on prayer is that it’s often a key for figuring out what you’re supposed to do. Rather than thinking of prayer as a ticket to a gift, look at it as a finger pointing the direction.
In the end, it’s still up to you to take action. Prayer just helps guide you to the right action.
I would approach your situation by asking your wife what her prayer is telling her to do. If she doesn’t know, suggest that she pray not for money to fall on her lap, but pray for some guidance on which path to follow.
Q5: Figuring out down payment
My wife and I are looking to buy a house. The price of homes in our area are around $270,000-$315,000. We are shooting to purchase a home for $285,000 or under. Currently, we have $45,000 in savings and are saving $4,300 a month since we just moved back with my parents at the end of January in order to save more. (My parents are more than happy to keep us here as long as possible so there is really no rush to move out.) I figure that by July we will have the 70,000 necessary for the 20% down payment, closing costs, and reserves. We also have an emergency fund of $5,000.
My question is whether it is smarter to go with an FHA loan and pay down my graduate student loans, which are at a higher interest rate or to save the extra money for putting down 20% of the purchase price to avoid the pmi and to have a lower mortgage for the next 30 years. I am leaning toward the 20% down because of the attractiveness of such a low mortgage payment, but I cant help feeling like doing so would be tossing money in the trash because our graduate loans are at a much higher rate. I am not good with numbers so I cant figure out exactly how much I am costing us by paying down the mortgage debt over the student loan debt.
Here are the numbers I do understand:
The interest rate for purchasing a home right now via FHA are at around 3.75% BUT our mmi on a $285,000 loan is a little over $250 extra a month and we wouldn’t be able to cancel the mmi for at least the first 5 years. (I know the mmi sounds high, but that’s what the bank quoted us.) Our mortgage payment on a FHA loan of $275,000 would be $2,200 a month ((purchase price) 285,000 – (3.5% down payment) 10,000 = 275,000 (loan amount)).
With a conventional loan of $228,000 and an interest rate at around 3.75% ((purchase price) 285,000 – (20% down payment) 57,000 = $228,000) our monthly payment would be approx. $1,600. Our graduate student loan debt is $90,000 at 6.55%. We have no other debt.
Long story short, are we losing money putting down 20% on the low interest mortgage and if so, how much?
You want to always minimize the interest rates you’re paying. So, what I would do if I were you is get some quotes based on your situation now.
When you get a quote on your mortgage, it will tell you the effective interest rate on your mortgage including the PMI and other factors.
If it’s lower than any of your outstanding debt, then you should pay off that outstanding debt first. That’s the move that will cause you to pay the least amount overall on your debts.
I would not get a mortgage until I had those higher interest debts gone and a 20% down payment, but if I were going to force the issue, I’d make sure I had the debts gone as a higher priority.
Q6: How much for extra payments?
My husband and I are in a somewhat good situation where we have more money coming in these days, yay, but a ton of bills/debt to pay off. The money isn’t always coming in consistently (while we both have base salaries, I am in sales, so commission comes in spurts and he gets a bonus here and there). I need help in learning how to pay down bills, but not too much so that we are left in the hole again for a month/few months. I get so motivated and excited to pay bills/pay off some debt, that I pay too much and then am left stressing again because we don’t have enough to get by for awhile. So how do you balance out paying off bills/debt with saving some when there are so many bills to pay? Is there some ratio, advice for knowing when to stop paying stuff and waiting a little longer.
Make minimum payments for a while. Instead, put every extra dime you have into a savings account.
Whenever that savings account has a balance of over $1,000 in it, put the extra toward your highest interest rate bill.
If you need some extra for an emergency, take the money out of savings, then replenish it when you have more money.
That $1,000 is your emergency fund, and it will protect you from such issues.
Q7: Distant family
I believe you’ve mentioned that your wife’s family is in Seattle. How do you guys deal with that? I’m originally from Portland, Oregon, and my husband and I are currently living in his hometown of Mechanicsburg, Pennsylvania. I love my husband and we’re certainly blessed by his family here, but I miss my family, and the Northwest, very much. We visit once or twice a year, and my parents usually visit us once a year as well. If we moved to Portland – besides facing the scary risk of giving up two stable jobs for a relatively unstable job market – I think eventually my husband would begin to miss Pennsylvania just like I miss Oregon. It really saddens me to imagine having kids here, and feeling “stuck” here, far from my family, for the rest of our lives. It’s hard to talk with my husband about this, 1) because I get pretty emotional when I let myself think too much about the situation, and 2) because he feels pretty helpless about it, and consequently, insufficient and guilty.
How do you and your wife deal with this situation? Does she miss her family? Do her parents get to see your kids very often?
My wife’s immediate family is split between northwest Washington state and rural Illinois.
For the portion of her family in Illinois, contact is pretty easy. We see them perhaps once a month for some reason or another.
For the portion in northwest Washington, it’s a bit trickier. Over the past several years, Sarah has been to Washington at least three times and our entire family has been out there twice. Since the crowd size in Washington is smaller than that in the Midwest, they tend to travel to the Midwest more often. We try, in the end, to have the total travel cost for all parties balance out. We feel that’s worked pretty well for us.
Communication is the key. Talk about these things.
Q8: Dream beach house?
Since I was 18 years old, I had wanted a beach house. My husband and I have saved for it for years. This year we sold our condo (mostly paid off) and were able to purchase the beach home of our dreams…or so we thought. We used $180K from the sale of our condo plus about $50K in cash on a down payment on the new home. Unfortunately, we took out a loan for about $543K with a 7/1 year ARM at 3.125% or $2325 per month. Now that we are moved in, I feel crushed by the debt I have taken on. All I want to do is sell the home and move into something that is more affordable. Secondly, the new home needs some work and I do not feel up to making the changes. I find the layout very difficult to manage and the house is way too big for our family’s needs. I made a mistake by paying $775K when our budget should have been around $600K max. We currently have no debt outside of our mortgage and are still able to save several thousand a month after mortgage payment…so we technically can afford it, but I am not comfortable with the debt. Lastly, we also realized that we probably overpaid about $75K for the home.
I feel that I made a rash decision on the house (busier beach location rather than a quiet location) and I do not “love” it like I think I would. Also, I am experiencing health problems (loss of eyesight in one eye from a macular hemorrage) and am considering limiting my hours at work so we can adopt children (work less or part-time) at some point.
My question is… when do you think we should consider selling the property? We are thinking of waiting around 5 years so we can save 100K or more in cash and any possible inheritance money. It would allow us to enjoy the house for a few years and we could downsize at this point…perhaps paying mostly cash for a smaller home further inland. The only problem is that we live in CA and it is difficult to buy anything for less than $500K in a desirable neighborhood or in good condition.
On the other hand, waiting to sell would result in us paying $100K in interest to the bank. We just think it would be rash to sell now because of all of the realtor’s fees, loan fees, and possibly selling the home for less than we bought it. Also, we have not really had the opportunity to really enjoy summers at the beach. Does this plan make sense to you? Or, should we consider selling soon and just accept a loss on the house…but get out of debt. I just feel like my priorities have changed since I was 18…but we would be throwing away the opportunity to live near the beach.
Without running the complete numbers, it’s hard to tell whether or not you’d be cash ahead by selling the place now and renting for a while or living in the house for a while (or perhaps renting it). There are a lot of factors to consider in that decision, from commuting costs to property taxes and upkeep.
This type of decision isn’t a purely financial one, though. It sounds like the house isn’t something you’re particularly enjoying and the realization hurts a bit. It just means you’ve grown as a person. Don’t let it get you down.
If you aren’t happy living there, sell, even if the money isn’t perfectly in your favor. There is value in living in a situation you’re happy with.
Q9: Combining credit card problems
Currently my fiancé and I own a home together with a mortgage balance of $91,000 on a home that is worth $134,000. We are in the process of combining our finances and both of us have a “problem” credit card. My card is at a $4,000 with an APR that would make you fall of your chair, and her card is at about a $5,000 balance with around a 12% APR. We are spinning our wheels on making payments, barely paying more than the interest charge monthly.
She has a very stable job at this point and I’m currently in a temp position while taking classes so my employment is currently not very stable. The reason I bring that up is because I am a little shaky taking unsecured debt and putting it on my home, but the money we would be saving a month is without question. My plan was to obtain a 10,000 Home Equity Line of Credit (currently at about 4.0% in our area) and paying off and closing both credit cards so we could not be enticed to use them again. I know I would take a credit hit since I have had the card for a long time but I already have a home and a car so I don’t think it bothers me that much.
That’s probably the best plan overall.
The home equity loan has the risk that you’re using your house as collateral. With the credit card debt, there really is no collateral (other than your credit score), so nothing directly painful can really happen if you default. With a home equity loan, if you default, you might face foreclosure.
If the move significantly trims your monthly payments, it is still probably the right move to make, though, as it secures your month-to-month financial position.
Q10: Simple game for couple
My wife and I often play card games in the evenings, but we really feel like we’ve exhausted most of the good two player card games with a deck of cards. After all, we’ve played a card game or two most nights of our five year marriage!
Do you have some suggestions of really good inexpensive two player games that are easy to learn? Also, we don’t want games that are too long like Monopoly which never seems to end. I know you and your wife play a lot of games so I was hoping for some ideas for something we could play a bunch of times in the evenings.
My wife and I play a lot of games and we have our favorites. However, if you’re looking for something straightforward that isn’t too long, I have a few ideas for you.
If you guys like card games, I would suggest Lost Cities. It’s something of a set collection game (vaguely like rummy) with five suits and some really interesting twists.
If you want a game you can play with the two of you, but also play with some others, I would highly suggest either Ticket to Ride or Carcassonne. Both are tons of fun with two players, and work well with any number up to five players.
Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.