Dear Liz: My mother passed away unexpectedly in late 2008. She had a mortgage, and the house was under her name only. She didn’t leave a will. My family is still paying the loan, and the company does not know my mother passed away. We don’t have a lot of money and we need advice on how to get the house under my sister’s name (she has good credit). We need to get the loan modified since the monthly payment is almost $1,000 and only about $70 goes toward the principal.
Answer: Your mother may not have created a will, but your state has laws that determine what was supposed to happen after her death. Lying to the mortgage lender is not one of the legal options.
Federal law allows mortgages to be transferred to heirs. (Without a will, those heirs usually would include a surviving spouse and the dead person’s children.) Transfers because of death typically are exempt from the due-on-sale or acceleration clauses that otherwise would allow the lender to demand full payment.
To get the mortgage transferred, however, you usually need to have started the probate process.
At this point, you should consult a mortgage broker about the likelihood of getting a refinance or a loan modification. If the home is deeply underwater, it may not be possible or worth the effort. If foreclosure is likely, it would be better not to transfer the mortgage as the heirs’ credit would suffer significant damage.
If your plan is feasible, however, then you’ll need to consult a probate attorney. You may not have a lot of money, but you need to pool what you have to hire someone who can dig you out of this mess.
Dear Liz: After reading your column about the best ways to pay while traveling in Europe, I want to share my experience. I was unhappy with the foreign transaction fee charged on my Citibank credit card, so on my next trip to Europe I primarily used my Capital One card. Imagine my disappointment to find that Capital One’s currency conversion formula was much less favorable to me than Citibank’s.
Answer: Credit card expert Odysseas Papadimitriou suspects you were comparing purchases made on different days, or even on different trips. Although one of your cards charges a foreign transaction fee and the other doesn’t, both cards get the most favorable rate from their card network’s exchange rate. Visa cards would get the Visa card network exchange rate, while MasterCard would get the MasterCard network exchange rate. If both your cards were Visas, for example, they would get the same exchange rate, but the one that charged the foreign transaction fee would increase your cost by that amount (typically 1% to 3%).
There may be “tiny” differences between those Visa and MasterCard exchange rates on a given day, but one wouldn’t be “much less favorable” than the other, Papadimitriou said.
And the exchange rates are certainly better than what you’d get by exchanging dollars for euros at a bank in advance of your trip, or by using currency exchange services once you got there.
So the fact remains that the cheapest way to convert currency is to do so automatically by making purchases with a credit or debit card that doesn’t charge foreign transaction fees. Here’s another suggestion for reducing fees abroad:
Dear Liz: One option for folks traveling to Europe to save money on ATM withdrawals is to check with their bank and find out if there is a checking or savings account that carries the benefit of the bank canceling foreign ATM fees as well as their own fees. Before I traveled to Scotland to visit my daughter, I switched accounts at my bank to one where there are no fees for using other banks’ ATMs. Worked brilliantly!
Answer: If your own bank doesn’t offer this option, it may be worth setting up a checking account with a bank that does. As mentioned in the previous column, Charles Schwab’s high-yield checking account offers unlimited ATM fee rebates worldwide with no foreign transaction fees, and Capital One 360, the online bank, waives ATM fees and absorbs MasterCard’s 1% foreign transaction fee. USAA Bank charges a 1% foreign transaction fee but doesn’t charge a fee for the first 10 ATM withdrawals.
Dear Liz: My in-laws just informed us that they have gone through their retirement fund and soon won’t be able to pay their mortgage. They borrowed against the house they’ve lived in for 30 years and currently owe $325,000. They are devastated, so I am trying to figure out the best way for them to stay in their house in their final years, as they are both 73. They have about $300,000 in equity but do not want to sell. They are willing to sell the house to my wife and me at their current balance. We would make the payments and they remain in the house. When they pass, the house would be ours. They looked into a reverse mortgage but this would cover only the payments, not taxes, insurance or maintenance. What is the best way to do this? Do I get a loan and purchase outright? Do I contact their bank and see if I can assume their loan? Do they quit-claim the home to my wife and me? My wife and I can afford to do this, but we want to make the right financial decision.
Answer: Before you do anything, please consult a tax professional and an attorney with experience in estate and elder law.
It’s unlikely the lender will allow you to assume the loan, so you probably would need to set this up as a sale of the home with you and your wife obtaining a new mortgage.
But their plan to sell the house to you at a below-market value could create gift tax issues and could delay their eligibility for Medicaid, should they need help paying for nursing home care.
There are other risks to your in-laws. Your creditors could come after the home if you lose a lawsuit, for example. You could sell the home without their consent, and you would have a claim on the property if you and your wife split up.
Then there are the risks to you. You say you can afford to make the payments (and presumably pay the taxes, insurance and maintenance as well), but what happens if you lose a job or suffer another financial setback?
All of you need to understand the risks involved, and your alternatives, before proceeding.
A sale of the home or a reverse mortgage may well prove to be a better choice. A reverse mortgage wouldn’t completely eliminate their home costs, but would substantially lower them — whoever winds up paying the bill.
Dear Liz: My husband works for the government and will be receiving a pension when he retires. Am I still supposed to save the recommended amount for retirement from my income or can that amount be reduced since we know we have the pension? We are starting a family and could use any extra money we can get right now.
Answer: If your husband is just a few years away from collecting that pension, counting on it to be there is reasonable. Since you’re just starting a family, though, it’s much more likely that retirement is decades away, and a lot can happen in that time.
Your husband could be laid off or fired, or he could quit. Even if he sticks it out, the government could change the way his pension is accrued to make it less generous. (The rising cost of public employee pensions concerns many lawmakers and taxpayers.) Even if he gets what he expects, his pension may not be enough to support the two of you in old age.
So yes, you should be saving for retirement. A cautious person would save as if no pension existed. Someone who’s comfortable with risk might simply aim to fill the gap between the expected pension and future living costs. Others might find a comfortable saving rate between those two points. You can use AARP’s retirement calculator to help you create a plan that allows you to take care of your family today without depriving yourselves in the future.
Dear Liz: Late last year, I applied for a credit card to buy a new computer on the computer maker’s website. I was declined. I was given the chance to talk to the credit card company’s agent and was belittled for having not-so-perfect credit, not enough credit and using too much credit, all in the same phone call. Needless to say, I got the message. I was also reminded that I’d had a charge-off on a competitor’s card in 1992! I always thought bad credit dropped off after seven years, certainly 10. Maybe you can clarify?
Answer: You need to take a look at your credit reports to see what lenders are seeing.
A charge-off from 1992 should have been removed in 1999, said credit expert John Ulzheimer, president of consumer education at CreditSesame.com. Charge-offs aren’t public records, so there would be no way for a credit card company to know that a competitor wrote your account off as a loss unless it’s still showing on your credit reports.
“This is why it’s a great idea to pull your credit reports from time to time to make sure ancient debts aren’t still on [them],” Ulzheimer said.
If the charge-off is still showing, you should dispute it with the credit bureaus to have it removed.
What might still be a public record is a judgment, if your old creditor filed a lawsuit against you and then took the trouble to renew the judgment to extend how long it could appear on your credit reports.
“That’s a little trick some lawyers play to keep judgments from expiring,” Ulzheimer said. “They’ll re-file them, sometimes in different jurisdictions, and the byproduct is new credit reporting.”
Under the Fair Credit Reporting Act, civil judgments have to be dropped after seven years unless your state has a longer statute of limitations. If it does, the judgment can be reported until the statute expires. The statute for judgments ranges from three years to 20 years. California’s statute of limitations for judgments is 10 years. Bills.com has a list of state statutes of limitation athttp://www.bills.com/statute-of-limitations-on-debt/. If you find a judgment on your credit report that should have expired, dispute it with the credit bureaus.
You also should remedy the other problems the representative brought up. You need to pay down the balances on the credit accounts you’re using (preferably paying them off in full). Once you’ve done that, consider adding another credit card to your mix — but use it only if you can commit to paying the balance in full each month. Paying your bills on time and responsibly using credit will help you put your “not-so-perfect credit” behind you.
Dear Liz: My daughter graduated from college seven years ago and moved to London. She has not paid her student loans. Do they drop off her credit reports like other unpaid debt? What about the government’s ability to collect? Does that expire as well?
Answer: The government can pursue people who owe federal student loan debt to their graves. There is no statute of limitations for collections activity, as there is on most other debt. Furthermore, the government has powers any private collection agency would envy. The feds can seize tax refunds, garnish wages without a court order and even take a portion of a debtor’s Social Security checks.
Your daughter shouldn’t expect the unpaid debt to vanish from her credit reports either. The federal Fair Credit Reporting Act limits the length of time other negative marks can remain, but that doesn’t apply to federal student loans.
The Fair Credit Reporting Act “is silent as it pertains to government-guaranteed student loans,” said credit expert John Ulzheimer, president of consumer education at CreditSesame.com. “The Higher Education Act allows them to remain on credit reports as long as they’re unpaid.”
There are so many affordable repayment options these days for federal student loans that it makes little sense to default. In cases of extreme hardship or low income, payments can be reduced to zero and the loans would still be considered current.
Your daughter needs to make arrangements to pay what she owes, especially if she ever plans to come home. The good news is that the Department of Education will work with her to get her loans out of default status, and clear up her credit, with an affordable payment program. She can start by visiting the department’s site at studentaid.ed.gov.
Dear Liz: I am 54 and considering retiring in three or four years. I have been fortunate to work at a Fortune 100 company for 30-plus years and have both a defined benefit pension plan and a 401(k). When I retire, we have the option of taking a lump sum or an annuity. Most financial people I talk to strongly recommend taking the lump sum, though I wonder if it is not just so there is more money to manage? My current inclination is to take the annuity (with survivor benefit for my wife). I think we can live off the annuity alone and use the 401(k) for emergency/fun/help-the-kids money, etc. I think if I took the lump sum and invested it, I’d always worry about what the market was doing. Am I off base?
Answer: Not at all.
Theoretically, you often can make more money by taking a lump sum and investing it than by accepting the annuity, which offers a lifetime stream of payments. But perhaps you’ve heard the quote “In theory, theory and practice are the same; in practice, they are not.” Anyone who knows much about behavioral finance knows there are many, many ways such a plan can go wrong.
You could pick the wrong investments, take too much or too little risk, trade too much or spend too much, and wind up much worse off than if you’d chosen the annuity. You could turn over the investing decisions to a pro, but there’s no guarantee that person won’t make mistakes. Even if he or she chooses great investments and allocates your assets well, your nest egg could still take a hit from the market.
If you were comfortable taking that extra risk to get the extra possible reward of more cash, accepting the lump sum would be the way to go. Since you’re not, there’s nothing wrong with taking the annuity. Opting for a survivor’s benefit means your wife will have guaranteed income should you die first.
Before you pull the plug at work, though, make sure you talk to a fee-only planner who charges by the hour to make sure your retirement plan makes sense. (Planners paid by the hour won’t have a vested interest in how you opt to manage your retirement funds.) Your assets probably will have to last 30 or 40 years, and you’ll have to figure out how to pay for the ever-escalating cost of health insurance. This can be a tricky process, so you’ll want expert, unconflicted help.
Dear Liz: I don’t know where to turn. My husband is 76. He has a federal government pension and collects Social Security but he has only a $17,000 life insurance policy. We still have a $229,000 mortgage and no savings other than my small 401(k). I am 59 and also a federal worker. Do you have any suggestions or guidance for me? Is there such a thing as an insurance policy that could pay off the mortgage if he passes before me?
Answer: Buying a life insurance policy on your husband that would pay off your mortgage isn’t necessarily impossible, but it would be expensive and might not be the best use of your funds. You can explore that option, of course, but you also should research your own retirement resources and what’s likely to remain after he’s gone.
Will your husband’s pension make payments to his survivor or will it end when he dies? How much will your own federal pension pay you when you retire? How much will Social Security pay you, and how does that compare with your survivor’s benefit (which is essentially equal to what your husband is receiving when he dies)? What are your options for maximizing those benefits?
You also need to know if your Social Security benefits could be reduced because of your public pensions. Some federal employees and employees of state or local governments receive pensions based on earnings that were not subject to Social Security taxes. When that’s the case, their benefits could be reduced by the Windfall Elimination Provision or the Government Pension Offset. Most federal employees hired after 1983 are covered by Social Security, but just in case you should check out the information at http://www.ssa.gov/gpo-wep/.
Once you have an idea of your income as a widow, you can compare that with your expected expenses and see whether continuing to pay your mortgage will pose a burden. If that’s the case, you might consider downsizing now to a place you could afford to buy with cash or a much smaller mortgage. Reducing your expenses also could help you build up that 401(k), which will help provide you with a more comfortable retirement.
Establishing a relationship with a fee-only planner now will help you prepare for the future and give you someone to turn to for financial advice should you be left on your own.
Dear Liz: I have really bad credit. I always have because I have never really had any money. So now I am inheriting a lot of property and some cash. Most of the property is rental properties that bring in income. There are no mortgages on them. I may want to sell one or two of them and buy a four- or five-unit apartment building so I can live in one and rent the others out. How do I do that? Unfortunately, it isn’t happening as quickly as it should since one of my siblings thinks it is all hers. So I have to go through litigation first.
Answer: Let’s start with some reality checks.
The kind of litigation you’re talking about can get expensive fast and eat into the estate’s assets. If your sister happens to be the executor, she may be able to have the estate pay for her defense. You’ll need to come up with the money to hire your own attorney to advise you, but often in these cases a settlement makes a lot more sense than a family war.
The next reality check has to do with your bad credit. Yes, it’s harder to pay your bills on a low income, but people do it. In fact, income is not even a factor in credit scoring formulas, since how much money you make doesn’t predict whether you’ll pay your debts. If you have bad credit, it’s because you borrowed money that you didn’t pay back on time, not because you “never really had any money.”
What will change if you get your hands on a substantial amount of money is that your creditors will renew their efforts to get paid. You’ll probably need some more legal advice to deal with those efforts and to avoid getting sued.
What probably won’t change, without some effort, is your poor money management skills. If you don’t improve, you’ll probably blow right through your inheritance. So you should add to your list of advisors a fee-only planner who can help you with budgeting, rebuilding your credit, investing and retirement planning. Seeking good advice and following it are the key to making money last. You can get referrals to fee-only planners from the Garrett Planning Network, http://www.garrettplanningnetwork.com. Another option is the National Assn. of Personal Financial Advisors at http://www.napfa.org.