Money Management Q&As

October 7, 2005



The benefit of a higher down payment

Q. I'm buying a home for $470,000 and would expect to put down 20 percent, or $94,000, but my real estate agent says I could save a substantial amount of interest with a slightly higher down payment. Is she right?

A. Very likely. Increasing the down payment by $16,350 would reduce your loan amount to $359,650, which conforms to the 2005 single-family home mortgage limit set by Fannie Mae and Freddie Mac for the 48 contiguous states (higher limits apply to Alaska and Hawaii). Lenders charge 0.25 to 0.50 percent less interest for conforming loans, because they can be sold to these agencies, which package such loans as investment securities. Larger loans by affluent buyers are more apt to be paid off prematurely and would therefore be less attractive to investors. A quarter-point rate reduction would save you about $900 a year on a maximum conforming loan.

Q. I'll be changing jobs shortly and wonder whether to leave my 401(k) money in my present employer's plan, which is performing reasonably well, or transfer it to my future employer's plan. What do I need to think about in making a decision?

A. Bear in mind that if you stand pat, you'll have to keep watch on two portfolios that may not work well together to provide proper diversification or market exposure unless you take more time and effort to manage them. But before putting all your eggs in the new plan's basket, it's important to evaluate the quality and performance of the mutual fund menu it offers. Rather than rush to judgment, consider shifting the money from your existing account into a self-directed IRA that lets you choose among a wide range of investments. Later you may be able to make a second tax-free rollover from the IRA to your new employer's plan, if you become convinced that's the way to go. To be certain of this option, ask the new plan's administrator in advance whether the plan permits such rollovers.

A gift tax break on college savings

Q. My son will be entering college in 2008, and I'm putting $55,000 into a 529 college savings plan for him this year. I understand that the entire amount will be exempt from gift tax if I treat it as though it were made over a five-year period. But would that mean my son couldn't use any of the money for tuition expenses until after 2010?

A. No. Regardless of when the money is actually spent for tuition, the $11,000 annual gift tax exclusion will apply to one-fifth of the $55,000 for each of the next five years, assuming you don't make any additional gifts to your son during that time. However, if you die before 2010, the exclusion won't apply for the years after your death; the balance of the gift will be added to your estate but may be covered by the estate tax credit.

Get all the facts before you lease a car

Q. I found the new car I want at a local dealership; how can I get them to provide all the information I need to evaluate their lease offer?