Money Management

Why it may not pay to dump an older mortgage

Q I've heard that a mortgage's age is a factor in the refinancing decision. How important is it?

A The older the mortgage, the bigger the interest rate differential you'll need to make refinancing worthwhile. That's because interest payments are front-loaded. For example, on a $200,000 mortgage at 8 percent for 30 years, the total interest cost comes to around $328,000. But you'll have paid more than $151,000 of it in the first 10 years, leaving $177,000 of interest due over the remaining 20.

Suppose you refinance your 10-year-old, 8 percent mortgage with a new 30-year one at 7 percent. Over the next 20 years, your interest cost will be $205,000, or about $28,000 more than you'd have paid on the old mortgage. True, your monthly payments will be lower during those 20 years—$1,167 instead of $1,468—saving you about $72,000 pre-tax. But at the end of the period, you'll still have a $100,000 debt, whereas with the original mortgage, you'd be fully paid up.

What if you could refinance at 6 percent instead of 7? Then you'd pay only about $172,000 interest over 20 years, your remaining debt would be $95,000, and your 20-year saving on monthly payments would total around $100,000 pre-tax.

For some tips on figuring whether or not to refinance, see "Interest rates have tumbled. Refinance your home loan?" in our June 18, 2001, issue.

Keeping track of municipal bonds

QI want to build a portfolio of municipal bonds on my own, instead of investing through a mutual fund and paying management fees. But how can I stay on top of possible deterioration in the financial health of the bond issuers?

A The SEC generally requires issuers to provide annual statements of financial condition, as well as notices of events that may affect bondholders adversely, such as downgraded ratings, delinquent payments, depletion of reserves, impaired credit, questionable tax-exempt status, early redemption, and sale or substitution of collateral property.

The municipality or other responsible party must file this information with certain designated national and state "information depositories." (For a list, go to www.sec.gov/info/municipal.shtml and click on NRMSIRs/SIDs under Rules 15c2-12.) You can view event notices for free at www.dpcdata.com. Web sites that can help you stay current on bond news, prices, and ratings include www.bloomberg.com , www.investinginbonds.com , www.moodys.com, and www.standardandpoors.com.

If a college savings plan shows disappointing yields

QMy contributions to a state savings program for my son's future college tuition have produced only meager earnings. Will I have to pay a tax penalty if I switch my son's fund to a different state program that has a superior investment record?

A No. Starting in 2002, you can roll over a college savings fund once every 12 months even if the beneficiary remains the same. You must make the transfer within 60 days of receiving the distribution from the present plan. (These restrictions don't apply to rollovers for the benefit of another family member.)

The new rules allow transfers between prepaid tuition programs and savings programs maintained by the same or different states, as well as between a state plan and a private prepaid tuition program.

Are you overpaying for an annuity death benefit?

QA 2001, article on variable annuities points out that their annual fees are higher than those of mutual funds. But the insurer guarantees that, no matter how poorly your annuity investments do, the beneficiary will never receive less than the total premiums paid. Isn't that worth the extra fees?

A Not in most cases, because the chances that your annuity account will be in the red when you die are slight, given the historical market uptrend. According to a recent independent statistical study, an annual charge of no more than 0.1 percent of annuity portfolio values would be enough to cover the risk. Yet insurers typically charge a 1.15 percent fee—more than 10 times as much—to guarantee return of premiums.

Among the rare exceptions is TIAA-CREF, a New York-based insurer and pension manager. Some mutual fund companies—Vanguard, for instance—also offer variable annuity plans that may charge lower fees.

Should long-term care insurance be bundled with life insurance?

Q Financial planner Gary Schatsky suggests that locking in long-term care coverage in your mid-50s makes sense, because premiums rise pretty fast after that ("Plug the gaps in your insurance policies," Feb. 19, 2001). But a lot of money could go down the drain if I die after many years without ever needing the care. Is there a way to avoid that waste?

A You may want to consider a hybrid policy—one that pays a death benefit in place of unused long-term care coverage. For example, an "Asset-Care" policy from Golden Rule Insurance (www.goldenrule.com) could provide either $150,000 of life insurance or up to $3,000 a month of home health care or nursing home benefits for 50 months. John Hancock Financial Services (www.jhancock.com) combines variable life insurance with long-term care in its Unison product. Policyholders choose a maximum monthly long-term care benefit of up to 4 percent of the death benefit. Other carriers offer similar options, sometimes as riders to life insurance policies.

However, Schatsky cautions, the cost of such provisions is built into these policies. They may provide added value, but you'll likely pay top dollar for them. Generally, you're better off buying the different types of insurance separately, he says.

If you hedge your bets when you sell a stock

QThe price of one of my stocks keeps sliding, but I hesitate to sell because I expect a sharp rebound when the market re-evaluates the company's prospects. In case I do sell, could I claim a loss if I immediately buy an option to repurchase the shares at the present price but don't exercise it for at least 30 days after I sell?

A No. The wash-sale rule treats a buy ("call") option like an actual purchase. But remember, the rule merely postpones your right to claim the loss until you sell the newly acquired shares or the option expires unexercised. (You add the loss on the original shares to your tax cost basis—what you paid for the new shares or the option.) So don't let the rule deter you from using the tactics you propose, if you want to protect against a continued drop in the stock's price and still preserve your chance to profit from a quick rebound.

Reviving deductions for student loan interest

QThe five-year time limit on deducting my student loan interest payments ran out in 1999. Does that make me ineligible to claim future deductions now that the limit has been repealed?

A No. You can resume taking deductions—up to $2,500 annually—for education loan interest payments you make after 2001, provided your adjusted gross income for the year doesn't exceed $50,000 if you're single or $100,000 if you're married and you and your spouse file jointly. Partial deductions are allowed for single filers with AGI of $50,000 to $65,000 or joint filers with $100,000 to $130,000. The AGI limits will be adjusted for inflation after 2002.

Edited by Lawrence Farber,
Contributing Writer

Do you have a money management question that may be stumping other doctors, too? Write: MMQA Editor, Medical Economics magazine, 5 Paragon Drive, Montvale, NJ 07645-1742, or send an e-mail to memoney@medec.com (please include your regular postal address). Sorry, but we're not able to answer readers individually.

Lawrence Farber. Money Management. Medical Economics 2002;4:104.