Updated on 03.13.11

Reader Mailbag: NCAA Tournament Predictions

Trent Hamm

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.
1. Handling a windfall
2. Underwater on mortgage
3. The best next step
4. More for the mortgage?
5. Saving up for payments
6. Package price increase
7. Maximize investments or pay mortgage?
8. Exercising at home
9. Buy cheap or reliable?
10. Inherited jewelry

For those of you who have read The Simple Dollar for a while, I am a big fan of men’s college basketball, particularly the season-ending tournament to determine the champion. The excitement of the upsets of the early rounds gives way to the intense matchups of the late rounds. It’s a mix that I can barely resist.

Most years, I give some sort of prediction as to who I think the national champion will be. My pick this year? I predict Kansas wins. (Of course, the can’t-miss games for me are the BYU games because of the crazy three point shooting.)

Q1: Handling a windfall
I am receiving in my divorce settlement $80,000 from my X2B’s 401(k). I know I can roll it directly into something else to avoid paying taxes on the gain right now, but what’s the best plan to roll it into? I have a small 401(k) at my job (only been here 2 yrs – I don’t know the amount off the top of my head but I think it’s with Vanguard) and a tiny (about $3-4K) 403(b) (or whatever the non-profit plan is) from a previous job (which I cannot add to unless I go back to work there). I need some guidance on (1) where to put the $80,000 I’m about to receive, and (2) how to do it.

– Kym

You have several options, assuming that you have a Qualified Domestic Relations Order. If you don’t know what that is, give your divorce lawyer a call.

First, you can just leave it as a 401(k). It will stay at whatever company your husband’s 401(k) is at, but it will be considered your 401(k) and proceeds will grow for you.

Second, you can roll it over into a traditional IRA (no taxes now, but you’ll be taxed when you actually use it in the future).

Third, you can just pocket the money. Again, it’ll be treated as normal income and you’ll have to pay taxes on it, just like the traditional IRA.

I would probably choose the IRA option. It gives you the most control over the money and doesn’t result in a major tax concern. For help in making that happen, choose an investment house and directly request assistance from them. I use Vanguard for my current retirement savings.

Q2: Underwater on mortgage
I live in Baltimore, MD and have the issue that unfortunately way too many other people in this country have in that my house is worth MUCH less than what the mortgage is for. I was able to buy the house on my own in June of 2006 and live in the heart of the city. At the time, buying a completely rehabbed place (downtown Baltimore and it’s surrounding neighborhoods are all rowhouses) for under $300K was a great deal and that’s exactly what I did. I was 24 and was given a mortgage without having to put much down at all. While I know now that this wasn’t the best move, at the time, I easily thought I would be able to sell the house in a few years for a profit or even rent it out for something at least close to the mortgage. Neither are true now.

The other night I was on Zillow and it had it worth $180K! While I still believe I would be able to get a bit more than this should I sell, it’s obviously no where near the $285K that I paid for it. Since I bought the house, I have gotten married and we both luckily have stable and good jobs. While nothing is 100% certain, we are both confident that our jobs won’t be going anywhere anytime soon. We do have some credit card debt as I just finished my MBA and had to pay via cards but those balances are being worked down fairly quickly. We have never missed a payment on any of our bills, including our mortgage and honestly we are financially OK paying these amounts while still contributing to our 401K, 403B, Roth IRA’s, savings, and regular trading accounts. I won’t go into our full financial situation since I don’t think it’s all that relevant to my question, but how does one go about talking to mortgage companies about a house that is probably worth $80-100K less than what the mortgage is for but at the same time, the owners are stable financially? Is there any sort of angle I can play with the mortgage company? I don’t want to start intentionally missing payments and messing my credit up when I’m able to pay the full amounts. Just because I’m lucky enough to pay the full amount, does that mean they won’t even talk to me about any possible options? I’m in a fixed rate (re-fied at 5% the end of 2009) loan with Wells Fargo but certainly wouldn’t complain if there was anything to be done about my monthly payment or the mortgage balance overall. I certainly don’t expect them to just “forget” about the difference in value, but I don’t want to threat not paying, foreclosing, or short selling when honestly I don’t need to. We are able to make the payments, but it kills me that we are paying so much more for something that is worth so much less now. I’m fine calling them but wouldn’t even know what to say or any sort of “buzz” words to actually have them work with me knowing that I’m financially OK. Any suggestions?!
– Phil

The only angle you have on the mortgage company is the threat that they’ll have to take a devalued property. You owe them $250K or so and they’re not about to swap that for a $180K property without a very good reason (meaning the loss of the $180K property is lower than the risk of actually getting the $250K from you).

The sad part is that the current housing situation does nothing at all for the people who are far underwater on their homes but have been keeping up the payments. They usually can’t refinance, their lender doesn’t view them as a priority, and walking away destroys their credit for a long while.

What you need to decide is whether staying in that home (with the bad mortgage) is better than walking away and destroying your credit for a few years. I can’t really answer that question for you. It’s the same ethical dilemma that a lot of folks in your situation face.

Q3: The best next step
I just found and started reading your blog regularly – I love it! I actually found it because I realized I needed a swift kick in the tush to get my finances in order and did some searching online. My first step in the tush-kicking process was to pay off my credit card debt (it’s completely gone – yay!). With that being said, I have a quick question for you about what I should do next.

Is it better to …

1. Double up on my car payments and get that paid off? I have a 2007 Nissan Sentra that I bought used and that I owe about $8,000 on still. I could double up payments and still put away about 25% of my pay each month into savings.

2. Increase my car payment by half and then put the other half towards my student loans? I have about $13,500 left on those.

3. Take the extra money and not do 1 or 2 and put it all into savings instead? My savings account has just hit 10K.

Originally, my plan was to double up payments and tackle the car loan. Once that was complete, I was going to add the money I was spending there to my student loans to get those knocked out. Once the car payment and student loans were gone, everything would go to savings. In the meantime, I would concentrate on saving at least 25% of my monthly pay and putting it directly into my savings account. In addition, I have a second job (I work a shift or two a week in retail) where I make about $30-$50 a week. I’m viewing this money as pretty much “untouchable” and just adding it to my savings.
– Carrie

I would focus on paying off whichever loan has a higher interest rate first. If they’re roughly equal, then I would focus on the car loan first, because that has collateral.

Splitting up the payments as you describe has little or no benefit – you’re far better off focusing on one of the debts. Splitting up payments delays the payoff date for both loans while also giving the higher interest loan more time to grow.

So, assuming your car loan is the high interest rate loan, I’d go for the first option.

Q4: More for the mortgage?
We are in a good financial situation with 12 months emergency, funding retirement and college accounts and our mortgage as our only debt. We bought our condo 4 years ago and moved for work about 10 months after closing. We rent it out to great tenants and are happy with the situation for now. We plan on staying in our current city at least 2 more years but even if we do move don’t plan on moving back to our place. We would consider selling it especially if the current tenants want to move out. Our neighborhood has continued to appreciate. We put 50% down and have a 30 year fixed at 6.25%.

I looked into refinancing but since it’s treated as an investment property the rate wasn’t significantly better. It didn’t make financial sense given it’s 99% certain we’ll sell the place within 5 years.

I know it’s often advised to make extra payments on a mortgage once the rest of the financial picture is good. I feel like we’re there but given that it’s a rental and that if we sell we would probably pay capital gains tax I’m wondering if that’s good advice for us. I’m talking with our accountant next week about the capital gains question and if there’s any way we can avoid it since we moved for a job promotion.

Should I put more towards the mortgage? If not, where should I put the additional savings we have each month?
– Wendy

Regardless of whether you pay off the mortgage early or not, you’re going to have the same capital gains tax issue. You paid $X for the house several years ago (financed with a mortgage) and hope to sell it for $Y in a few years. The taxable amount on the capital gains is still $Y-X, no matter whether the financing still exists or not.

So, the real question is whether or not it makes more sense to pay down a mortgage at 6.25% or to use it elsewhere. Paying down the mortgage has the benefit of providing a guaranteed 6.25% “return” on your payment (every dollar you pay on the mortgage eliminates interest in subsequent years). It also has the benefit of improving your monthly cash flow.

Since there is no investment out there that will return you a guaranteed 6.25%, I’d pay down the mortgage.

Q5: Saving up for payments
I’m trying to payoff my car loan ASAP (@ 6 years 9.8% interest… ugh). I am currently contributing about an extra $150 a month to help pay it off sooner ($500 total); but at that rate it will take forever it feels like (Current Balance: $20,282.xx)

I also have a automatic transfer to my savings account which is $180 a week (180 x 4.3 = $774 a month). That balance is 30% of income. I am pretty comfortable with my current savings balance.. covers about 3 months with bills.

SO! My question is this…

Instead of contributing that extra $150 to the loan, what if I put it in my savings along with the “extra savings” ( I now plan on using the $774 a month as a car payment now that I am comfortable with my savings balance) and let it earn interest (very little yes) and build it up + the minimum payments I will be making now and pay it all off in one transaction after about 18 months? Is it wise to do this? One advantage I think is that I will be maximizing my savings but this assumes nothing goes wrong for the next 18 months……..
– Dan

That’s a really bad idea. Here’s why.

Let’s say you make a $200 payment on your loan right now. That payment will eliminate $19.60 in accrued interest this year, about $20 in accrued interest the year after that, and even more the year after that. Your $200 turns into about $260 (or so) if you have your loan paid off in three years, because you’ll be paying $60 less in interest over the lifetime of the loan if you make that $200 extra payment right now.

On the other hand, if you put that $200 in a 1% savings account, it’ll earn about $2 a year. Your $200 turns into only $206 in three years.

Although it feels painful, the best choice by far is to keep plugging away at that car loan as hard as you can.

Q6: Package price increase
I signed up for a Dish Network contract last year (don’t ask me why – this was before i started reading your blog) – the price was supposed to 39.99/month for 2 years. First year they would give me a credit of $15/month bringing down the price to 24.99/month.

Now they increased the price to 44.99/month. I called them and inquired about this – i was told that they can increase the price of the package though i’m in contract. Which i felt was odd – shouldn’t there be an option for me to get out of contract – if there is a price increase in the contract.

Is this legal even?
– Ron

It depends on the contract you signed, but it’s most likely legal. Most contracts allow the company to adjust the price of such packages in almost any way they wish.

The reason that they don’t jack the price way up is that they’d have many more problems. Lots of customers would stop paying, and even those that could pay would be looking to jump ship at the end of the contract.

Still, if you’ve signed a contract with them, you’re going to be living with their price hikes, unfortunately.

Q7: Maximize investments or pay mortgage?
I am a 53 year old single mom in southern California who returned to the work force five years ago. I am fortunate enough to own a home and to receive $79,000/year from my job, plus another $14,400/year from a divorce settlement pension. I have only about $4,000 in liquid savings.

I own my home, which is valued at about $255,000, about $200,000 less than it was 8 years ago. I owe $166,500 at 5.5% fixed on my first mortgage and $90,300 at 3.25% variable on my HELOC (from a time when I was too ill to work – I haven’t used it in 5 years). My total payments are $1,550 plus I put an extra $200 towards principle into the HELOC every month. (The HELOC minimum payment has been as high as $500 back when interest rates were at 8%). I have no other debt, but will need a car soon to replace my 1997 4-Runner and am putting $300/month into a savings account for a future car purchase. I have cut my expenses to the bone (insulated the house, no land line, cheapest cell plan, no cable TV, use the library, cook at home, carpool, thrift store shopping, etc. etc.).

Currently I contribute about $1,000/month into the pre-tax, government equivalent of a 401k plan, and have a balance of $41,000. I also have an annuity of about $70,000 with a guaranteed 7% return.

I plan to retire at age 66, when my (unfortunately taxable) total income sources will be about $1,700/mo from social security, $1,200/mo from the one pension, $2,900 from another pension, plus any investment income. At the current payment rate, my mortgage and second will be far from being paid off when I retire.

I figured out that if I throw another $500/month into the mortgage and HELOC principal, they would be paid off by the time I retire, which would be like having another $1,550/month in income. But then I’d only be contributing $500/month into my pre-tax investments so they’d be worth far less when I retire. Also with the mortgage paid off I would not have the interest write-off on my taxes.

So my question is, in this instance, would it be better to pay $1,000/month toward the pre-tax investment, or split it 50-50 with extra mortgage & HELOC payments and pay off the mortgage within 12 or 13 years?
– Joyce

You should not plan on retiring at age 66 if this is your financial situation. Retirement at that age would mean some extremely lean living regardless of what path you choose right now. The numbers simply don’t add up to a healthy retirement in thirteen years, no matter what.

The first step I would take is talking to my lenders about refinancing both the fixed rate mortgage and the adjustable rate HELOC into a single fixed rate loan. Interest rates are going to rebound and when they do, you’ll be in an even worse position. Lock those two in as low as you possibly can. If you can’t refinance (which might happen, depending on your financial institution and your payment history), focus solely on paying things down until you can refinance. I would focus on whichever of the two has the higher interest rate at the moment and keep your eye on lowering that amount to whatever numbers are needed for you to refinance. Don’t worry about the tax writeoff of your mortgage interest – it is a small perk, nothing more, nothing less.

Once you’ve done that, I would just make the minimum mortgage payment and save every dime that I could for retirement. Once you’re in that situation, your monthly mortgage payment will be lower than your mortgage payment is right now, let alone your HELOC, so your monthly cash flow will be better.

The key then is to keep working and saving until you reach a point where you can safely finance your life with your pensions and retirement savings. I would be surprised if that happens by age 66, unfortunately.

Q8: Exercising at home
I know you may have addressed this before, but I am really interested in a frugal but smart way to exercise at home. So many at-home options seem cheesy and cheaply made. Going to the gym is not an option with my work schedule and kids. As well, I live in a tiny town and would have to drive 12 miles to the nearest YMCA.

Currently I am using resistance tubing ($5 Walmart, 2 bands, but they will need replacing in a few months) and one 12-pound set of dumbells. Do you have a post that talks about this?
– Sheila

Deciding where to exercise is more about goals and about where you’re at in terms of shape than anything else.

If you’ve never exercised before, your best bet is to simply start a walking routine to get yourself up to a solid level of cardiovascular fitness. By walking, I don’t mean trudging for a little while, I mean walking at a reasonably fast pace to get your wind up a little. Since spring is dawning, now is the perfect time to start doing that outdoors.

If this is already easy for you and you’re looking for more intense training, I would probably point you towards a gym situation. The next step for most people is weight training, and focusing too much on a single muscle group is actually somewhat dangerous. The equipment needed to push lots of different muscle groups in turn would be expensive, and a gym membership is cheaper than the equipment, especially if you’re unsure if this is just a fad for you.

Again, if you’re not exercising now, start by walking. If that’s a routine you can’t establish on your own, then a gym membership would most likely be a waste of money.

Q9: Buy cheap or reliable?
I’m in my 20s, snowballing my (currently) $80K in student loan debt, and I’m getting closer to moving out of my parents house. I’m going to be in debt for a long time and will need to buy house-things soon. There are the expensive-frugal options (a $250 vacuum that reliably lasts for 10 years) and the cheap-frugal options (a $50 vacuum that sometimes lasts 3 years, but has a big risk of “lemons”). Sometimes the most frugal choice, the expensive-frugal, is just too expensive. Sometimes it is be do-able, but at the expense of putting that money toward debt. How do I choose between expensive-fugal and cheap-frugal purchases? In the absence of a compelling reason to choose one over the other (expensive vacuum would substantially alleviate asthma or cheap vacuum is good enough because I only vacuum twice a year anyway), I find this to be an especially difficult decision. Even making these choices strictly mathematically is difficult because I can’t really know how long anything will last.

– Jessica

My suggestion for people in your situation is to buy everything you need at first as cheaply as you can, utilizing Goodwill and the like. Do not go into debt furnishing your house for the first time.

Over time, start replacing things. The things you use frequently will be the things you break first, so those should be the ones that you replace with high-quality items. In other words, you’ll be able to tell what things you use a lot by what things break quickly because you’ve used them a lot.

With your vacuum analogy, I’m not sure if vacuuming only twice a year is a good choice if you have asthma. My understanding is that frequent vacuuming is a much better choice, as it keeps allergens from building up and makes people with asthma less dependent on rescue medications.

Q10: Inherited jewelry
I inherited a fair amount of jewelry from my mother; it’s all 14 and 18k gold, and a lot of it has precious stones as well. None of it is anything I would ever wear – too big and gaudy – so I am wondering if I should sell it while gold is high and bank the proceeds, or hold onto it as a hedge against some future dollar devaluation. (Sometimes my common sense goes on vacation and I fall prey to the apocalyptic predictions swirling around and envisage myself someday having to barter a ring for food or something.) Any advice? What would YOU do?

– Lisa

The first thing I would do is get it appraised by a jeweler that I trusted, probably by more than one. Make sure you have what you think you have, and ask them for what they would do if they were looking to sell it.

Often, jewelers buy such items directly, and you’ll get more out of jewelry that way than by selling them for scrap gold. Even if they’re not interested in buying it, they’ll have good suggestions for what you should do with it locally.

A close friend of mine inherited what he believed to be a ruby ring, but when he had it appraised, the ruby turned out to be fake. This is actually something of a regular problem with inherited jewelry, at least in my understanding of it.

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.

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  1. Kevin says:

    Re: Phil, Q2

    I don’t understand why Phil thinks he deserves some sort of charity from the bank regarding his mortgage. It’s not the bank’s fault that his house has gone down in value. Why should the bank forgive any part of Phil’s loan? He borrowed the money and promised to pay it back. The bank had nothing to do with how much Phil paid for the house, or the house’s current value.

    If Phil borrowed $100,000 and bought a bunch of GM stock that subsequently dropped in value to $50,000, would Phil expect the bank to cut him a break on that, too? Of course not. He’d still owe the bank $100,000.

    Or, to put it another way, what if Phil’s house went UP in value? Say he bought for $300,000, paid off the mortgage, then years later sold for $500,000. How would Phil react if the bank showed up and said, “Hey, we noticed you a made $200,000 profit on that house we helped you buy. Give us half.” Yeah, right.

    Sorry, Phil, man up and pay your bills. Keep your promises.

  2. Courtney20 says:

    Trent, you were doing pretty good until Q9. Jessica says “In the ABSENCE of a compelling reason to choose one over the other…” and then proceeds to give two extreme examples where there would be a compelling reason to buy a very expensive or a very cheap vacuum cleaner, neither of which apply to her.

  3. Monica says:

    RE: Phil, Q2

    I can tell you, from personal experience, that if you are current on your mortgage, Wells Fargo won’t even entertain a call from you. Dealing with them … holy disaster Batman.

  4. Sandra says:

    Re: Q4

    I sold a condo a while ago that I had rented out for a few years (for a myriad of reasons, I will never be a landlord again!). Assuming that they have been depreciating the property, $Y – $X is not the correct equation for calculating the capital gain or loss. The correct equation is the value when the property was converted – the depreciated value (sales price minus depreciation).

  5. Interested Reader says:

    Did you even READ Q8 where she said gym is not an option with her schedule and she’s was asking you for good at home alternatives?

    @Q8 you should check out exercise.tv a great website with lots of streaming videos for exercise that you can do at home either with or without equipment. There are also downloadable videos, some very cheap and they stay in your account so you can redownload them. (I bought a few 3 years ago and I can still redownload). They cover a variety of things – weight training, flexiblity, aerobics etc.

    Currently I’m renting various exercise dvds from netflix to see which ones I like and trying before buying.

  6. Adam P says:

    Like Courtney20, I think you really need to work on your reading comprehension if you are chastising the letter writer for not vacuuming more than twice a year. She was giving an example of a situation where there would be no compelling reason for a person to buy an expensive-frugal vacuum. She was NOT saying she has bad housekeeping skills!!!!


  7. Johanna says:

    Q7: I don’t understand why you think Joyce won’t be able to retire comfortably at age 66. She’ll have $4100/month in pension income, plus Social Security and investment income. Assuming she’ll be supporting just herself, that should be plenty to fund a comfortable lifestyle, even in an expensive part of the country, and even with a $1500 mortgage payment.

  8. Katie says:

    Seriously, Johanna – that’s almost $50k a year before the investment income. Why on Earth would that involve “extremely lean living”?

  9. Andrew says:

    Disappointed with the answer to Q8 after going to the gym was clearly ruled out.

    If you’re looking for cheap ideas, my gym-free setup consists of running with my dog, situps/pushups, a couple of adjustable dumbbells and an exercise ball. The weights and exercise ball were free from a family member and are very versatile for working out lots of different muscle groups. My sister also bought a used elliptacil trainer for under $100 and has seen good results since running hurts her knees.

  10. Johanna says:

    Q2, Phil: Read any news story about the mortgage crisis, and you’ll see that there are many, many people who are much, much worse off than you are. And often, the banks are giving even *them* the runaround. There is no way you are going to get your lender to voluntarily reduce your mortgage balance.

    As far underwater as you are, strategic default (“walking away”) may be an option that makes financial sense for you. If that’s something you’re considering, talk to a lawyer.

  11. Diane says:

    Wow! I was frantically seeking a way to soften my response to Q2. Thanks to #1 Kevin, I don’t have to. Your last line says it all:

    “Sorry, Phil, man up and pay your bills. Keep your promises.”

    The only thing I’ll add to Phil is: stop seeing your glass as anything but full and start counting your blessings. Someday, you’ll look back on this period and laugh. You’ll also be able to sleep better at night knowing that you did the right thing.

  12. valleycat1 says:

    Q2 – You took out a loan & can make the payments, so do so. Unless you have to move now for some legitimate reason, or your financial situation has changed & you can’t afford the payments, the current market value really has nothing to do with anything. Unless your home is unlivable, why ‘strategically default’ & walk away from a perfectly good house? If the time comes later down the road that you need to sell it & you’re still under water, that’s the time to talk to the bank about a short sale.

    Q8 – the web is a great source for reviews of various exercise programs, DVDs, exercise books, etc. in addition to the streaming videos mentioned by the commenter above. Many towns have stores that specialize in selling used exercise equipment, from weights to machines, where you can find a good deal. The basics are a good aerobic exercise, some weight training, and possibly yoga for flexibility & balance.

  13. Kacie says:

    Q2: Unless I’m missing something, the mortgage holder has no desire to move out and isn’t having any financial difficulties. Pay your mortgage and enjoy your home! Prices could go up again by the time you do want to sell. When people’s car loans are underwater, they don’t do anything about it.

    Q7: I agree with Johanna. I don’t understand why she wouldn’t be able to retire comfortably at age 66, either. $5,800/month before taxes is pretty good, PLUS her investment income. Um…yeah, so what’s the problem here exactly with retiring then? I don’t get it.

    Q8: I don’t have time or interest to go to a gym. So I do a home workout of an exercise bike and also DVDs. I rent DVDs on Netflix or use their streaming option and if there’s one I love, I buy. I’m a huge fan of the 10 Minute Solution series. I do lots of Pilates with them. Definitely try to preview the DVD before buying because you might not like it. Once the weather gets nicer, I plan on running outdoors.

  14. todo es bien says:

    You know I respect your opinion, but I too am curious as to why you believe that $5800 a month is too lean to retire on. Pretty sure that would put her in the top 1/3 of income earners in the United States, and most households have multiple members. Not to mention, possibility of income investment. Did you make a mistake? I am curious to hear your line of thinking here. best regards, todo.

  15. Des says:

    Since Trent didn’t give a real answer to Q7, I’ll take a shot…

    Don’t think of it as “pre-tax vs. mortgage”. Rather, think of it in terms of the return you are likely to get vs. the risk you’re taking. Paying down your mortgage gives you a guaranteed return, but its probably not as high as the one you would get in stocks.

    If it were me, and I were 13 years out from retirement, I would put the money into stocks for the next three years, then phase it over time until it was all going to the mortgage at retirement. But then, I feel ok with a bit of risk.

    Trent must have done his math wrong, there isn’t any reason indicated that this person can’t retire on schedule.

  16. Bobbi says:

    Re: Q8 – there are lots of blogs and web sites that promote body weight exercises – exclusively. Very beneficial and, of course, no cost.

  17. Johanna says:

    “It’s not the bank’s fault that his house has gone down in value.”

    Actually, it kind of is. Not necessarily Phil’s bank in particular, but banks in general, by pushing people into poorly regulated mortgages they couldn’t afford and didn’t understand, were a huge part of the reason why house prices went up so far and so fast – which of course is why they’re falling so much now.

    Not that this has any bearing on what Phil should or shouldn’t do. But the banks were not innocent bystanders here, by a long shot.

  18. jim says:

    Q2 Phil : “Is there any sort of angle I can play with the mortgage company?” Nope. They’ve got no reason to do anything. What if the shoe were on the other foot, would you help them out?

    You haven’t sold your home and you didn’t say anything about wanting to move. So right now you havne’t actually lost anything. Its all on paper. I also wouldn’t put too much stock in what Zillow says, it has a margin of error. According to Zillow thier Baltimore values are off by 10% or more about half the time. I’ve seen some large errors here. One house in my area sold for $315k and Zillow says its worth $350k, another sold for $465k and zillow says it was worth $401k. Thats 10-15% swing either way.

    Q7 Joyce : Retiring at 66 with about $70k in SS & pension income is just fine. I don’t know why that would be a concern for Trent.

    If you get any kind of matching funds for your retirement account then I’d at least contribute to the account up to the point of the match. Otherwise I think paying extra to get your HELOC paid down off at least would be a good idea. The primary mortgage is fixed at 5.5 so thats not bad at all. Itt wouldn’t hurt to still have that after retirement. But that HELOC is variable and the rate will go up in teh future. It would suck to be 65 and have interest retes be back in the 8-10%. I’d focus on paying down the HELOC.

  19. Michelle says:

    Q10 – Sorry, in the event society braks down, you’re not getting ANY food from my garden for a gold ring! Sell it, by some seeds and learn to garden. That’s how you turn a gold ring into food.

  20. Johanna says:

    And to Kacie and anyone else who would advise Phil to just hold on until the market comes back: That’ll work, if he doesn’t mind holding on until 2027. That’s how long it will take for a house worth $180K today to increase to $285K, assuming appreciation at the historical 3% rate – and assuming that values in Phil’s neighborhood don’t have any further to fall.

    On the other hand, if Phil were to default on his mortgage now, the black mark on his credit will be long gone by 2027.

    I’m not saying Phil *should* walk away (or that he shouldn’t – that’s for him to decide). But if you’re “just holding on” with the expectation that we’ll be seeing 2006-type values within another year or two, that’s very, very unlikely to happen.

  21. jim says:

    Sandra comment #4 is correct that the tax bill on a rental is more complex because of depreciation recapture. You may have to pay taxes on the amount depreciated as ordinary income. But since they bought it 4 years ago its a good chance its now worth less than what they paid for it. Without knowing the original purchase price and fair market value its hard to know how the taxes will end up.

  22. Kacie says:

    @20 — I don’t think that values will shoot up drastically (enough to recover his losses) in the near future. But he has to have SOMEWHERE to live for the rest of his life, ya know? So why can’t it be the house he’s already paying for?

    If there’s no need to move, then he should stay put and keep on paying his mortgage like he agreed to when he signed the papers.

    If he walks away, he’ll have to pay for housing somewhere else.

  23. Johanna says:

    @Kacie (22): Sure, since he can afford to stay put, that’s certainly an option. But it isn’t necessarily the best one. Of course he has to pay for housing somewhere, but it’s possible that he could be paying many hundreds of dollars a month less.

    Whenever a question like this comes up, somebody always argues that the homeowner hasn’t “lost” anything until he sells the house. The way I see it, that’s not true, because he’s still paying for the house at the inflated price. If you’re paying $2000 a month on a mortgage when you could rent an equivalent place for $1000, then every month that goes by, you lose $1000 (give or take a little for the various costs and benefits of homeownership). Even if you can afford to lose $1000 a month, that’s not peanuts – that’s real money that can make a real difference in your quality of life, your future financial security, or both.

  24. AK says:

    Q8: There are tons of good, cheap options to exercise frugally…the gym isn’t one of them. I’ve been a runner for years; you can run outside for just the price of a decent pair of running shoes. Sure, you can drop a lot of money on special running clothes, gps watches, ipods, etc. BUT you don’t have to. Plus, you mentioned having kids and a work schedule. Now that I’m a mom of two – soon to be three – kids, I choose running because I can burn the most calories in the shortest amount of time.
    Another good, cheap option is to pick up a pair of dumbbells and a DVD at Walmart. I personally suggest the Jillian Michael’s 30 day shred which is a set of 20 minute killer workouts at three difficulty levels. (Again, burns a lot of calories in a short amount of time.)
    Contrary to Trent’s advice, you can actually walk/run and strength train concurrently.

  25. valleycat1 says:

    Q8 – another good, progressive, strength training program is in Strong Women Stay Young. I have the book, but I’m sure there’s a video out there somewhere! If you have young children at home, they can enjoy some of the dance-based exercise programs or WII exercise routines along with you.

  26. SwingCheese says:

    AK, you beat me to it!! Q8 – I started running around the time my son was 1 1/2, and I LOVE it. But the best part is, I can do it around my husband’s or babysitter’s schedule. And the calorie-burning effects are impressive. Consider entering a race. For me, not wanting to come in last is a powerful motivator (even though I’ve been pretty darn close to last!) Also, I was going to mention the 30 day shred. I got it from Netflix, and was able to keep it as long as I wanted to. I’ve found that Netflix has a good selection of exercise videos in general – I ordered some pre-natal yoga dvds there, too.

  27. Becky says:

    Q2: Banks are certainly not innocent in the whole mess we are in, however rent has not changed dramatically in the past 3 years in most places. Phil chose to take on the extra expense to own his condo vs. rent and he should take responsibility for that choice. #1 Kevin put it perfectly, although many people refer to buying a house as a “good investment” not many are willing to pay the bill when they are faced monthly with the proof that their investment didn’t pay off. Bottom line is Phil chose to take on the mortgage and could have chosen to rent and buy gold instead (isn’t hind site a bummer).

  28. ChrisD says:

    Phil should write to Alan Greenspan and point out that his failure to do his job and call the bubble has had serious consequences (albeit not for Alan).

  29. Rebecca says:

    Q8- I know Sheila said the gym isn’t an option for her, but for those that it is, you can check out a local university or community college, many of them have classes through a community or continuing education program which are much cheaper than those at a gym. One local university gives access to a pool, gym-quality equipment and an indoor track for a very reasonable monthly fee that I plan to take advantage of after graduation. You may also be able to find students who are becoming personal trainers, and hire for a very reasonable cost- and they may be willing to come to your home and/or help you design a workout with what you have at home

  30. Michelle says:

    If the gym isn’t an option, maybe get a Wii? Or an XBox with the Kinnect? I got Zumba for the Wii and LOVE it! Great workout, and my kids love the hour long dance party we have everyday.

  31. VickiB says:

    I second the running. And the most expensive shoes are not always the best – go for fit & feel, and don’t feel like you’ll hurt yourself if the shoes don’t cost a hundred bucks ! I’ve gotten running clothes at Goodwill and Thrift Shops, and clearance racks at discount stores. you DON’T need expensive gear !

    For the gal just starting out – Trent is right – check out flea markets, yard sales for stuff you need. When I got older and finally DID have funds to make a CHOICE of what I wanted for my house, I discovered that I had overpaid for so many things like dishes, crockpots, wine glasses, end tables, etc. Once you get into it, it’s actually FUN to go looking for this stuff !

    To the guy in Baltimore – you bought a house. A house is a place to live, or, to rent for income. I think it’s value WILL rebound eventually, but consider this – if you lived in an expensive area, and you found an apartment you absolutely LOVED, that was perfect and convenient and next to your favorite park, would you pay more for it than for the “bargain” apartment further away in the burbs (if you were a renter)? If you could afford it, the answer is probably yes ! Value of the home is not the consideration here. Do you like it? Can you afford it? Nice neighborhood with convenience? Then stay and don’t lose sleep over it.

  32. lb says:

    Q9- When you’re just starting out, it is worth asking around to family friends and relatives to see if anyone has any household gear that you can have. You’d be surprised by how many people have a perfectly good set of dishes or an old dresser, ect just sitting around. My grandma died around the time that I first needed to furnish an apartment and my aunt had her lamps, rugs, kitchen table and microwave- which saved me a lot of money and always reminded me of my grandma. A friend gave me a futon, someone from church gave me a lamp and a dresser, and I found a bookcase with a free sign on the side of the road. A big benefit is that you might not get as attached to free items- which makes them easier to part with if you move. Seven years and two cross-country moves later, the only one of those items I still have is my grandma’s table.

  33. DrLT says:

    Sheila: You can absolutely get good results by exercising at home, and it is essential that you incorporate weight training into your routine as early as possible because it is all about building muscle! I exercised at home for many years with great success. There was a program on our local PBS station called “The Body Electric” that went through all the muscle groups and did a great job of teaching you how to lift weights and tone your body. This was in the days of VCRs and I recorded several tapes’ worth of episodes and used them at my leisure. Nowadays you can find the same kind of thing online or on DVD–I’ve looked at exercisetv.tv and a couple of others. You can get a lot of content for free and check it out before you decide whether to actually purchase something or subscribe to their premium content (which is still cheaper than a gym membership). As far as equipment, if you get a basic set of weights–3, 5, 8, 10, and 12, and maybe a mat or, if you want to spend a little more, a bench, you can do almost anything you want to do. (You can combine weights if you need more than 12–say, a 5 and a 10 to get 15.) There are other great options–like the exercise balls, steps, etc.–but for less than $50 you can get enough to start with and keep you going for quite a while. We also invested in an elliptical trainer and got a lot of use out of that. It was a fairly basic Nordic Track and cost us $600 or so at the time. I would do a half hour of cardio work on the elliptical and then half an hour of weights with the recorded program most days of the week,and I lost a lot of weight and got in very good shape. I have a gym membership now and I don’t think I get any better of a workout now than I did then–though there are more options. All this having been said, the most important thing I did, I think, was to educate myself about exercise and weight training so that I learned to do the exercises correctly and I can evaluate for myself when I see something online or in a magazine, whether it is going to be effective and how to do it correctly and even adapt it to what works for me while still getting good results. Good luck!

  34. Jamie says:


    I’ve seen a lot of good reader responses for gym alternatives, but thought I’d pipe in anyways.

    Cardio is the easy one. Go running; if you can’t go running (I have bad knees), go biking (if you don’t have a bike, you can get a solid used one on Craigslist for $50), if you live in a place that’s too cold or you get off work too late to be outside or if biking or running don’t appeal to you, use a jump rope or do jumping jacks (I do this stuff while watching movies).

    For strength training, I like to use exercises that I found on Shape Magazine’s website– They have a lot of at-home strength-training programs. Nearly all the exercises that I do at home use my body weight, no extra weights or equipment, and they still leave me sweaty and panting.

    I don’t have room or funds (or the need) for extra equipment, but the supposed must-haves are a yoga ball, resistance tubes, and free weights. Since you already have two of those, you pretty much have your own gym at home.

    Also, depending on the ages of your children, you may be able to incorporate them in your workout– I see Mom-and-kid workout regiments all over the place.

    Hope that helps!

  35. Evita says:

    Q8: Sheila, Trent obviously does not know much about exercise so read all the commenters, they have excellent suggestions!
    A good plan would be 3 days of strenght training (start with 10 minutes, up to 30), alternating with 3 days of cardio (20 to 45 minutes). Your exercise bands are fine, and you can get dumbbells for about $1 per pound. 3 to 5 pounds are good for female beginners. You can get instructions and routines from the sparkpeople site (free) or from a book (Denise Austin or Joyce Vedral are quite good for beginners).
    For cardio, either fast-walking or running outside, weather permitting, will get you fit. Add intervals when you get better.
    I hate gyms, they are expensive and inconvenient. For years, I used exercise DVDs, there are tons. I like Leslie Sansone for indoor walking. See the collage videos site for video reviews.
    And good luck, you can do it!

  36. Petunia says:

    Q7 – Currently she earns 79k, pays $4400 to SS and Medicare (this year, 6k most years) and invests 12k per year for retirement. So retirement income of 69,600 not counting any withdrawals from her retirement accounts, while no longer paying 6k in SS and Medicare taxes or 12k towards retirement puts her in a better position than she is in right now. So yes, she is on track to retire at age 66.

    I second the suggestion that she focus on that Heloc. It could get very ugly in the future. The first mortgage is OK.

  37. socalgal says:

    Q2- I made $200K on my house when I sold it in 2003. I lost $25K when I sold my house in 2008. I certainly did not send the bank money when I made money, so why would I expect the bank to reduce my loan if I was losing money? You have good jobs–enjoy the house.

    Q10- I was in the same predicament as you. I found a gemologist who appraised all 21 pieces for $600, then took the pieces to three separate jewelry stores that I discovered by asking friends who they would recommend. Some of the pieces were sold as scrap, some just the stones were sold, and other were sold via consignment.

  38. Mimi says:

    Q8: It looks like you have great suggestions from the commenters! I second the running, it really helps melt away fat.

    Something I’ve recently found it bodyrock.tv. It is a little more advanced (but I figured with 12lb weights you must be a little more advanced). most of the exercises uses ONLY your body weight and is made to do at home. Exercises only last 10-20 minutes and there’s a new exercise every day. It also takes care of most of your cardio since it’s very high intensity for a short period of time. It definately kicks your ass! Btw, I’ve been doing it for 2 weeks and I can see results in my arms (especially my triceps!) and stomach !

  39. MARY says:

    I second #5 and #35 for frugal exercise. I have gotten Leslie Sansone DVDs from the library and from freecycle. Freecycle is great for other exercise stuff such as step platforms,exercise balls,weights,etc. Sparkpeople is another option on the web. They have mini-videos on how to do different exercises.

  40. joyce says:

    Sheila and other exercisers……check out the web site “acefitness.org’ from the American Council on Fitness. I am a licensed Physical Therapist Assistant by trade and have found this web site very helpful and more importantly correct regarding type and form on exercise.

  41. Annie says:

    I think Joyce is in an excellent position to retire at 66 because of the income she is going to be receiving from her pension along with her SS. I think she can have more than a lean life. Not sure why you think she is not ready at 66.

    For Sheila, if you have cable there is FIT TV which has great cardio and dance exercises that you can do on your free time. You can record it and use it for later use if you have a DVR. My personal favorite is Gilads bodies in motion and his body sculpture sessions, not only did i lose 15 pounds just strength training without weights but i didn’t have to go to the gym and use expensive equipment. I think you can buy his dvd’s online also, they are reasonably priced and you can use it over and over agian. It might be a good investments.

  42. Brittany says:

    I guess I also don’t understand why Phil is so concerned that he is underwater… are you planning on moving very shortly? Did you recently have a huge drop in income? No? Then pay your damn mortgage. It’s not a guaranteed investment; it’s a place to live. Treat it as such.

    For at home exercise, have you tried bicycling? It’s a good alternative if running kills your joints like it does mine.

    Also, I feel like Trent missed the boat on most of these, having missed really essential information in most questions (vacuum examples, $5800/month retirement not being lean, telling a woman searching to gym alternatives to just go to the gym, and such.) What gives?

  43. Marilyn says:

    RE: Q2 and #42 – I agree – who cares if you are underwater? But to the second point, even if you did have a big drop in income, why should I (as a mortgage holder who pays her bills, and a shareholder in bank stocks) pick up your slack?

    I am a big believer in a social safety net, but the whole idea of people walking away from their responsibilities makes my eyes bleed. You need short term help when you are unemployed, maybe an abatement in payments? Ok by me if you are going to pay them back later. You have an illness and want to try and negotiate a short sale now so you can leave your house and everyone can move on? Perhaps I could even support this – for the bank, it is a reasonable business discussion whether they should take less now or hold out for more later – the same as we all do when we sell a stock whose price has fallen.

    But you want to stop paying, or have the bank absorb the loss in your market value because the market did not go your way? No dice. My stock portfolio remains in the tank, who is going to pay me back for that?

    As another poster pointed out – the banks don’t come to the borrower looking for a piece of the profit when home prices go up; they only get back what they lent plus an agreed upon interest rate.
    Now, are banks all wonderful? Absolutely not, and I have no sympathy for those who dealt in predatory lending practices, and I do want to see some accommodation for people who got caught up with fraudulent brokers. But you bought a house at the top of the market? Tough. You bought a house you could not afford, because you assumed your income would rise, or you’d be able to easily refinance? Tough. You chose a variable rate loan and its interest rate has gone up (which is the cry we’ll hear from people in the next few years) – suck it up.

    And Trent, shame on you for not sticking to the principle of “we pay off our loans because it is the right thing to do” instead of giving a wishy-washy “you need to make that decision.” The decision will always be Phil’s no matter what you say, you should have the fortitude to say “our country and economy are strong because/only when people do the right thing.” Are you going to teach your children that it is OK to walk out on their commitments if they are no longer convenient? I know that’s not what I teach mine.

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