Money Management Q&As

June 2, 2006



Beware of advisers who target seniors

Q. My mother attended a financial planning seminar presented by a "Certified Senior Advisor," but I'm uncomfortable with some of his advice. What does that CSA credential prove?

A. The designation, issued by the Society of Certified Senior Advisors, simply means the speaker completed a three-day course (or a home-study equivalent) that provides training on health, financial, and social issues that pertain to the elderly, then passed a multiple-choice exam. Continuing education requirements for maintaining the designation are minimal.

Your mother should carefully evaluate the seminar speaker's knowledge, experience, and background before accepting his advice or doing business with him. The securities regulator in her state can tell her whether the adviser is licensed and whether he or the firm he represents has been the subject of any complaints or disciplinary problems.

What to read into an inverted yield curve

Q. Recently a financial analyst on TV mentioned that the yield curve for Treasury bonds had inverted. He didn't go into much detail, but I got the sense that it can be a bad sign for the economy. What does it mean?

A. When the yield curve inverts, it means short-term bonds are paying higher rates than long-term ones. That can indicate slower growth for the economy and a squeeze on banks' profits. It can also mean that investors have a pessimistic view of the country's growth prospects. And historically, when short-term rates have outpaced long-term rates by a percentage point or more, recession has often followed within two years.

This doesn't necessarily mean we're heading for a recession, however. Although two-year Treasuries have periodically yielded a bit more than 10-year Treasuries in recent months, the spread has been quite small-typically just hundredths of a percentage point. And other factors besides slower growth and investor pessimism have helped keep long-term yields low, among them, strong demand for Treasuries from banks in Japan, China, and Europe. Moreover, an inverted curve benefits bond investors, since they can get higher interest rates without taking the additional risk that accompanies long-term bonds.

Ways to cut a mortgage rate

Q. My wife and I want to buy a newly built home, but we may not qualify for a large-enough mortgage. Even if we do, it will be tough for us to make the payments this year. The builder has suggested a two-for-one buydown. What is that, and is it a good idea?

A. With a two-for-one buydown, you'd initially start with a rate that's about 2 percentage points below the going market rate. It would rise 1 percentage point the next year, the same amount the following year, then remain fixed for the rest of the term. The main disadvantage of a buydown is that the fixed rate that'll apply after Year Two will likely be higher than one you can guarantee yourselves today-probably half a percentage point higher. Say you get a 30-year, $300,000 loan that has a 5 percent interest rate in Year One, 6 percent in Year Two, and 7 percent for the remaining 28 years. Unless you refinance or sell the home before the loan's term ends, you'll pay nearly $36,000 more in interest than you would have if you'd locked in a 6.5 percent rate from the start. Moreover, someone must either pay points or fund an escrow account to cover the shortfall to the lender in the first two years. Presumably the builder would do this, but he may pass the cost along to you by raising the price of the home.