We owe about $77,000 on our Orlando home, which was recently appraised at $105,000. We have a second mortgage of about $5,700, which will be paid off in July 2002. We have about $10,000 in credit card debt at 10 percent interest. We have two car payments totaling $930 monthly. Though the cost of living here is about 20 percent higher than in Orlando, our overall income has remained about the same as when we left.
We wanted to refinance our home along with the balance of the second mortgage and the credit card debt, but it was not a sound option. We then thought about getting a home equity loan of $16,000, but lenders won't touch us. Now we're considering a home equity line of credit for up to $25,000 (so we can put a down payment on a new home here), but we're running into obstacles there too. The biggest obstacle we are facing is that our Florida home is now not our "primary residence," and therefore the lenders risk factors shoot way up. Our credit is among the best you can have but apparently that doesn't matter to lenders.
We desperately want to buy a home this year but our options seem to be thinning. Are there other options we can look into that we are not aware of? What do you suggest we do?
---M.M., Plano, TX (by e-mail)
A. There is an option you haven't tried. It's called patience. Your credit rating does matter to lenders but they may have a better sense of your being tapped out than you do. One thing they are probably looking at--- and will definitely consider in the purchase of your next home--- is your "back-end" ratio. That's the grand total of all your monthly commitments.
While some lenders will extend the limit, particularly for high-income buyers, the usual rule of thumb is 36 percent for all commitments (including alimony and child support) and 28 percent for mortgage, real estate taxes and insurance. In other words, you're allowed about 8 percent of income for non-home commitments. Go over that amount and it starts to reduce the amount available for home financing.
With $930 in auto loans and $200 of monthly credit card service on $10,000 you've got $1,130 a month in consumer debt service. If your income is less than $14,125 a month or $169,500 a year, your non-housing debt is already crowding out your ability to borrow to buy a house.
Here is what I suggest. First, take a deep breath and do a reset. Put the Orlando house on the market as soon as possible. Sell it. Look for a new house when you have closed on the Orlando sale. While you are waiting, learn about home financing and personal credit and use one of the calculators on the web to see how much house you can qualify for with your other debt.
Q. I recently sold stock options, which have given me a little over $1 million, after taxes, to invest. I have about $1 million in real estate (home, lake lot, ranch) and $1 million in ownership in my private business (non-liquid). I also have adequate income to cover expenses for the next 5 years until I plan to retire. I have no stocks or bonds at this time, but I think it may be a good time to put my available cash into the stock market now. I am beginning to talk to investment managers to get someone to help me manage a stock portfolio.
Would you invest all the money now or would you trickle it in over the next few months to dollar cost average in case the market is still going down? Would you use a manager or would you use your couch potato fund approach? I don't have time to manage this myself if I were to pick specific stocks.
---M.A., Dallas, TX (by e-mail)
A. Although it runs against the grain, studies show that you are best off making commitments immediately. The odds favor stock prices being higher in the future. At very least, I would commit 50 percent now and put the remainder to work over the next 6 months to one year.
The rest is more a personal decision than an investment decision. Many people like the idea of managing their own money and are happy with the Couch Potato approach. It's inexpensive, it's simple, and it keeps you from making big mistakes. Others like having professional management.
My suggestion: interview money managers. For all the talk of mega wealth, a million dollar account is still a very nice account and you should be able to get your money managed for 1 percent a year--- less if you negotiate lower fees on a balanced account. Just remember you can always retreat to a Couch Potato portfolio.
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