Get smart with your money
Today’s top story: What will long-term care cost you? Also in the news: Social Security myths, the best cities for first-time home buyers, and how to pay less to your credit card company.
What Will Long-Term Care Cost You?
Almost everyone will need it after 65.
Don’t Believe These Social Security Myths
Checking the facts.
These are the best cities for first-time home buyers
7 spots to look at.
Here’s how to pay less to your credit card company
Just pick up the phone.
Dear Liz: I am trying to purchase my first home. I have a 20% down payment for the price range that I am looking for. The issue I am running into is that I have relatively new credit and my credit score is not great at all. I had to go to the emergency room two years back with no insurance and have medical expenses that went into collections. I am now in a financial spot to pay them off. These are the only negatives on my credit report that are unresolved. Will paying these off get my credit to the point that I can buy a home? I am lost as to how to get my score where it needs to be.
Answer: Unfortunately, paying collection accounts typically doesn’t help your credit scores, especially the scores used by most mortgage lenders.
Since you’re new to credit, you may not realize that you don’t have just one credit score. You have many. The two major types are FICO and VantageScore. The latest versions of each (FICO 9 and VantageScore 3.0 and 4.0), ignore paid collections. In addition, FICO 9 and VantageScore 4.0 count unpaid medical collections less heavily against you than other unpaid debts.
But mortgage lenders typically use much older versions of the FICO score, which count all collections against you even if they’re paid.
That said, it would be tough to get a mortgage with unpaid collections on your credit report. Since you have the cash, you may be able to negotiate discounts so that you can resolve these debts at a somewhat lower cost. (Collectors typically would much rather get a lump-sum settlement than wait to be paid over time.)
You’ll also want to get some positive information reported to the credit bureaus to help offset the negative information. The fastest way to do that would be to persuade someone you know who has good credit to add you as an authorized user to one of his or her credit cards. This person doesn’t have to give you the card or any access to the account. Typically, the account history will be “imported” to your credit reports, which can help your scores as long as the person continues to use the card responsibly.
Another way to add positive information is with a credit-builder loan, offered by many credit unions and Self Lender, an online loan site. Usually, credit-builder loans put the money you borrow into a savings account or certificate of deposit that you can claim after you’ve made 12 on-time payments. This helps you build savings at the same time you’re building your credit.
Secured credit cards also can help. With a secured card, you make a deposit with the issuing bank of $200 or more. You get a credit limit that’s typically equal to that deposit. Making small charges on the account and paying it off in full every month can help you build credit without paying interest. You’ll want a card that reports to all three credit bureaus, because mortgage lenders typically pull FICO scores from all three bureaus and use the middle of the three scores to determine your rate and terms.
Dear Liz: My wife and I are both retired and receiving annuity payments. In addition, we have about $1.3 million in traditional IRAs and $350,000 in another annuity that will pay us each about $1,000 per month. We are moving from Texas to Arkansas sometime in the next year. Texas has no state income tax and pretty high property taxes, while Arkansas has lower property taxes but about 6% income tax. We plan to put down about $200,000 on a new home and obtain a mortgage for about $350,000 at about 4% interest.
Does it make sense to withdraw money from the IRA to pay down the amount we need to borrow for the mortgage? I can withdraw about $90,000 without putting us into the next higher federal tax bracket, if that makes any difference, and end up saving $5,400 in Arkansas income tax at the same time.
By my calculations, the return on the $90,000 would be almost $8,000 every year in reduced mortgage payments if we took out a 15-year mortgage. If we did the 30-year loan, that savings would be over $5,000. I don’t think we’ll achieve the same returns on $90,000 leaving those funds invested as they are in bonds or cash.
Answer: It usually doesn’t make sense to tap retirement funds to pay down a mortgage, but your case may be one of the exceptions. You have enough saved that the withdrawal won’t claim a big chunk of your available funds and leave you cash-poor.
We’ll assume you’re over 59½ and won’t face penalties for early withdrawal. If that’s the case, then you’ll also be facing required minimum distributions within a few years. These mandatory withdrawals, which must start after you turn 70½, would subject at least some of this money to taxation. The question is whether you want to pay those taxes now or later, and you’re making a pretty good case for now.
Before you withdraw any money from a retirement fund, however, you should consult with a tax pro or a fee-only financial planner, or both. Mistakes made in early retirement often have irreversible consequences, so you want an objective second opinion before you proceed.
Dear Liz: In a recent column, you quoted an attorney saying that if an inherited home in a trust is sold for its value at the date of death, the trust won’t owe capital gains. We sold our family’s house in 2007 within a month of my mother’s death and the government took half. Fortunately it was a really valuable house in Brentwood, but what are you talking about? I must be missing something.
Answer: If the government took half, then estate taxes — rather than capital gains taxes — probably triggered that hefty bill.
When your mother died, the estate tax exemption limit was much lower — $2 million, compared with the current $11.4 million. The top federal estate tax rate then was 45%, compared with 15% for capital gains.
Today’s top story: Understanding the closing cost for a home seller. Also in the news: How being neighborly can save you money, what homeowners ready to sell need to know about the changing market, and how increased China tariffs might cost you money.
What Are the Closing Costs for a Home Seller?
Closing costs can be significant.
How Being Neighborly Can Save You Money
Howdy, Neighbor!
12 Million Homeowners Ready to Sell: What They Need To Know
The seller’s market is shifting.
How Increased China Tariffs Might Cost You Money
The personal cost of the trade war.
Dear Liz: My mother recently passed away. The title to her home was held in the family trust. My siblings and I are in the process of clearing out the house in preparation for a sale. Do we need to obtain a “step-up” basis appraisal before the sale to use in determining capital gain on the home? We do not know the original price paid for the home in the late 1960s. Alternatively, could we use an appraisal made in November 2016 as a basis and apply the one-time $250,000 capital gain exclusion?
Answer: You definitely need to establish a property’s value for income tax purposes soon after the owner’s death. If you sell within a year, you could use the fair market value as the home’s new basis, said estate planning attorney Burton Mitchell.
“There is no law about this one-year period,” Mitchell said. “It is just what is often used by both IRS and practitioners.”
You may want more certainty or think the sale may not happen within a year. Estate planning attorney Jennifer Sawday of Long Beach recommends you immediately reach out to a real estate agent to get a broker opinion value letter or hire a certified real estate appraiser to determine the exact value of the home at the date of your mother’s death.
“If you are able to sell the home close to or not much higher than the date of death valuation, the trust will not have any capital gains,” she said. “Plus real estate expenses and other trust administration fees will be computed against the home selling price to minimize any capital gains as well.”
A tax pro can help you figure this all out. The costs of hiring tax and legal help can be charged to the estate.
All the gain in value from the past five decades won’t be taxed. In some parts of the country where home prices are high, such as California, that step-up in basis is far more valuable than the $250,000 home sale exclusion, which you wouldn’t be able to use anyway unless you lived in and owned the home for at least two of the previous five years.