Jewish World Review July 18, 2000 /15 Tamuz, 5760
Getting out of an upside-down loan
DEAR BRUCE: Five and a half years ago my husband was getting restless and bought a 1995 motor home, a 24-footer. At the time this was OK, we could afford it.
Only a few months later he died. Subsequent to that time, my income has diminished and I am having a difficult time making the payments, and there are still 10 years to go.
I have contacted all manner of RV dealers that advertise in magazines and newspapers, but nothing has happened. I am told that I just owe too much on it. I am what is called "upside down."
I called the bank and asked if I could just stop paying and they could have it, but they said no way. They did reduce my interest by one-half of 1 percent. Big deal! What can I do? -- M.D., Sacramento, Calif.
DEAR M.D.: Unfortunately it would appear that you financed the entire cost of the motor home or very close to it. As a consequence, upon the depreciation that takes place when you drive out of the showroom, you are "upside down" and will be for most of the payment period.
By the way the bank did you a favor. They had no obligation to lower your interest or make any concession to you. The fact is that I don't think that you will want to have a repossession.
The only choice you have is to sell it and pay the difference between what it's worth and what you owe.
Everyday that you keep that thing, it depreciates in value. Unless you are enjoying it, and you clearly are not, your only legitimate option is to get out from under it, lick your wounds and get on with your life.
DEAR BRUCE: I am a little confused about IRAs. I figure that if you put after-tax dollars into a Roth IRA, as opposed to before-tax dollars into a 401(k), at the end you will have more money in the 401(k). And assuming a 25-percent tax, it will be about equal to the tax-free investment in the Roth. Is my thinking flawed? -- J.F., Anchorage, Alaska
DEAR J.F.: The one question, if not a flaw, is where did the 25-percent tax rate come from? Nobody knows what they will be charging in 30 years.
At this point, making the assumption of 25 percent is at best a guess. We know the amount of money in the Roth IRA will be altogether yours.
DEAR BRUCE: I live in rural Montana. I have a 30-year home mortgage of approximately $100,000 at 7.25 percent. I want to upgrade and remodel my home for $20,000. This sum is available to me as disposable income.
Would it be wiser to use the money for the upgrade or pay down the loan and borrow money for the additions? This would seem to be a no-brainer but I can't figure it. -- G.B., via e-mail
DEAR G.B.: I can't figure either. What would be the advantage of paying off 7.25 percent mortgage and then re-borrowing? It seems to me that you are in the exact same situation except in all likelihood you will be paying a higher interest rate.
If those are the two options, it makes sense just to use the $20,000. If you have equity in the home that would support a $20,000 loan and you itemize, then it would make sense to borrow the money using a home equity loan at a reasonable rate and invest the $20,000 in the marketplace.
You then have picked up whatever the interest is on the $20,000 as a tax deduction, and perhaps made a good return on your marketplace
Send your questions to JWR contributor Bruce Williams by clicking here. (Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.) Interested in buying or selling a house? Let Bruce Williams' "House Smart" be your guide. (Sales of the book help fund JWR).
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