Blind faith in TV advertisers can cost you

Dear Liz: I need help. I am getting ripped off by a company that advertises on television. The company bills your credit card for stuff you didn’t order. They need to be exposed and stopped. Can you help me? They don’t even have an email address to contact, and they seem to be ruthless. How can they be allowed to advertise on TV and fool the public? It is sick! I tried to cancel and they said it was already shipped.

Answer: You have far more faith in television advertisers than you should. Just about anyone can buy advertising time, including scam artists, as long as their check to the station or channel doesn’t bounce.

Call your credit card company and let it know you’ve been scammed. Then create a paper trail: Follow up with a written letter asking that the charges be removed, your account closed and a new account opened with different numbers, since the scammer may try charging you again.

In the future, you should regard all advertisers, whatever the medium, with skepticism. If you’re purchasing from a company for the first time, at a minimum you should research its return policy and make sure it has multiple ways to be contacted in case there’s a problem. An Internet search that combines the company’s name with the word “scam” also can be illuminating.

No down payment saved? You’re not ready to buy a home

Dear Liz: My wife and I are considering buying a home for the first time. We’re planning to switch our accounts from our bank to a credit union. We’re in the midst of receiving a bad report from the bank, and that’s why we want to change. But is that a wise choice when we want to buy a home? Also, what options do we have for a mortgage when we don’t have any money for a down payment? Are we locked into an FHA loan, or are there other choices? We are middle-class people making an average of $40,000 a year with no kids and OK credit scores.

Answer: If you don’t have a down payment saved, you aren’t ready to be homeowners.

Homeownership is expensive, with lots of unexpected costs constantly popping up. Some are relatively minor, like having to replace a worn-out appliance, while others are major, such as having to replace a furnace or a roof.

That’s why homeownership isn’t a good idea for people who aren’t already in the habit of living below their means and saving a decent proportion of their incomes.

Take the next year or so to tweak your spending and save up a down payment. You’ll need at least a 3.5% down payment to qualify for an FHA loan. A bigger down payment will give you more loan options and won’t leave you upside down on your home from the first day. A 20% down payment is often best, since you can avoid private mortgage insurance.

A year also will give you time to polish those credit scores from “OK” to “good.” The higher your scores, the better the interest rate you’ll receive.

But the fact that you’re receiving a “bad report” from your bank is worrisome. You don’t specify what happened, but anything that could be reported to the credit bureaus, such as a missed credit card payment, could cause major damage to your scores. Simply switching to another institution won’t prevent that. And if you’ve piled up a bunch of bounced checks, your credit reports may not be damaged but you could find it difficult to open new accounts at other financial institutions.

Whatever happened, you should try to straighten it out with the bank before you decamp, even if you ultimately decide to switch accounts.

Why you shouldn’t pay down your mortgage

Dear Liz: We have a 7% fixed-rate mortgage with a $150,000 balance and a second, adjustable rate mortgage with a balance of $100,000. I’m self-employed and my wife doesn’t work. My income fluctuates a lot every month. We just sold a property and have $240,000 left after taxes. Should I pay off both mortgages or just the adjustable loan?

Answer: When deciding whether to pay off a mortgage, many people focus on how much interest they could save or what their “return” on their money would be. (If you’re in a 35% tax bracket for federal and state income taxes, for example, your return on paying off a 7% mortgage would be 4.6%.)

In reality, though, most people have better things to do with their cash than pay off relatively low-rate, tax-deductible debt.

Are you, for example, on track with your retirement savings? Do you have a substantial emergency fund? Most families would be wise to set aside a cash reserve to cover three to six months’ worth of expenses. Someone who is self-employed with a non-working wife might want to boost that emergency fund to 12 months’ worth of expenses.

Are you adequately insured? Since your wife is financially dependent on you, you probably should have a substantial life insurance policy. You may want to get one on her as well, if she cares for minor children and you’d have to hire a nanny if she died. You may also need disability coverage.

If you’ve covered all these bases and still want to pay off your mortgages, feel free. Otherwise, put the money to better use.

Do your research before relocating

Dear Liz: I’m 55 and single with no dependents. I have about $250,000 invested. I rent an apartment in Los Angeles. I work in sales, which I can do anywhere. Would I be better off buying a house for about $150,000 now (somewhere in the middle of the country), thus reducing my living expenses (property tax and insurance will cost much less than rent) and leaving me with about $100,000 left for retirement, or just continuing to invest the entire $250,000 for retirement?

Answer: Moving to a less costly part of the country is a time-honored way to make your money stretch further in retirement. It also can help you save more for retirement if you dramatically lower your living expenses.

What you don’t want to do, though, is incur all the expenses of moving and buying a new home only to discover you hate where you’re living. Do substantial research and visit your targeted communities at different times of year before you commit.

Also, tying up 60% of your portfolio in a single, illiquid asset such as a home is risky. You may well be better off moving to a cheaper area and continuing to rent until you’ve built up a bigger nest egg.

Saying “no” to struggling parents

Dear Liz: You recently had a letter from an adult whose financially irresponsible parents expected yet another bailout (“Parents expect another bailout from son“). As a therapist, I wanted to comment.

“No” is an emotionally laden word, and so few people are comfortable using it, especially when it comes to our own parents. If the 30-year-old were a client of mine, I would help him bear the pain and grief of loss. This is what any son who loves his parents and feels responsible for them must be feeling as he witnesses his parent’s financial troubles. Yet his hands are tied. The parents have a history of bad money behaviors, and the son can’t fix the problem that was probably present before his birth. “No” is the proper boundary.

If the son gives his parents a session with a financial planner, he must strengthen himself against further disappointment. If not, he will find himself in financial quicksand along with his parents.

Answer: Thanks for your response. While many would feel a moral obligation to help struggling parents, setting limits is essential. There’s also a legal component to this: See “Do you have to support your parents?“