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If You Plan To Cut Spending: Refinance & Reduce
Staff - Mortgage Lenders Plus.com
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Q: We just met with a financial planner, and we are seeking a second opinion. My husband and I are about 50 years old, and we'll both have pensions when we retire. Our house is worth about $500,000 with 12 years to go on a $110,000 mortgage at 5.5 percent. We also have a $55,000 home equity loan, $25,000 in car loans and $20,000 in credit-card debt. We are living paycheck to paycheck and have to use credit cards for anything that comes up. Our yearly income is $100,000. Our financial planner has suggested that we refinance our home for a $210,000, 30-year loan and pay off all debt. He says that the tax write-off will help us and that we will be able to have a bigger cash flow. Although the idea sounds appealing, we are hesitant to borrow so much against our home. His response was that people will always have debt and that we should be putting more money away for retirement. What do think of this plan? Name withheld by request A: Refinancing your home won't do any good unless you change your spending patterns. Your debt was not a result of paying too much in interest. Your debt was caused because you have been spending more than you can make. There's no question that refinancing your home will reduce your monthly payments and reduce your income taxes. But it may not help your financial situation one bit. In fact, it may cause considerable damage to your long-term financial well-being. Why? Because paying off your consumer debt could cause you to go out and spend more. I've seen it happen more times than I care to remember. If you replace your auto and credit-card debt with a new mortgage, you'll be paying off those cars and credit cards the rest of your lives. The Toyota that you bought for $20,000 could cost you $50,000 by the time you factor in finance charges over the next 30 years. Refinance your home only if you have a plan to reduce your spending. If not, you may find yourself at retirement time with not only a $200,000 mortgage, but $100,000 in consumer debt as well. Q: I understand the $500,000 exemption when selling a home, but what about a vacation home? My wife and I have a second home at the beach that we have owned and lived in for the past 18 years. We are planning to sell. Will we have to declare capital gains taxes? Ed, via e-mail A: In order to qualify for the $500,000 ($250,000 for single taxpayers) capital gains exemption, your beach home must have been your primary residence for at least two of the past five years. Unless your beach house was your primary residence, you'll be slapped with capital gains taxes on the difference between what you paid for the place and the net selling price. On the bright side, you've got two things going for you: One, federal capital gains of 15 percent are at their lowest level in decades, and two, real estate prices are at all-time highs. Q: I have a duplex that is rental property. If I do a 1031 tax-free exchange, what is the waiting period that I must hold on to the property before I can move into it as my primary residence? Marilyn, via e-mail A: Basically, you cannot exchange an income property with another property if your intent is to use the new property as a personal residence. Whether you wait 30 days or three years before you move in, if your intent is to use the home as a personal residence, you cannot exclude your gains under the 1031 tax-free exchange rules. The key word is "intent." Because intent is very difficult to prove, many tax advisers suggest waiting at least one year after exchanging a property before you convert it to a personal residence. The tax code does not list a time frame, so you should keep the new rental for a long enough period of time for you to illustrate to the IRS that your original intent was to keep the property a rental. Search Mortgage Lenders Near You! (Scott Hanson, CFP, is a senior adviser with Hanson McClain, an investment advisory company and registered principal with Securities America, member NASD/SIPC. E-mail questions to questions(at)moneymatters.com.)
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