When you refinance ...

Nov. 1, 1998
If you are thinking about refinancing the mortgage on your home, here are some important pointers ...

Hugh F. Doherty, DDS, CFP

If you are thinking about refinancing the mortgage on your home, here are some important pointers ...

The biggest mistake you can make is not going to several banks to get the best deal. When you are shopping for the best deal, make sure you compare total transaction costs such as: points, appraisal, handling fees, plus miscellaneous charges. Then divide the expense by your monthly interest savings to estimate how long it may take you to recoup the costs in each case.

Before committing to a new bank, check with your present one. If your payment record is spotless and you have at least 20 percent equity in your home, your present lender may be willing to reduce your interest rate to keep your business.

Assuming a new appraisal and credit check are unnecessary, the refinancing fee could be very nominal. One national, leading lender charges $500 for such an "in-house" arrangement.

Unlike the points on a new home-purchase loan, those points for refinancing generally aren`t deductible in full, but must be spread over the mortgage`s term. If you refinance a second time, though, you`ll be able to claim the undeducted balance then. As for other loan fees, you cannot write them off at all. Instead, you add them to your new home`s cost basis. While that will reduce your capital gain when you sell, your future tax benefit is dubious, in view of the generous exemption on home-sale profits now in effect.

Rolling pension money into an IRA

What if you expect to terminate your retirement plan when you turn 65 later this year, and you haven`t decided what to do with the money?

Some big questions rolling around in your head might be, if you first roll it over to a conventional IRA, "Can I eventually take it as a lump sum? Will I be able to use special averaging to lower my tax? What if I decide to roll the money from the pension plan into a Roth IRA instead?"

The answer to the first question is, "No." Averaging is available only for plan distributions, so you might want to delay closing the plan until you make up your mind. If you were born before 1936, you can choose between two averaging methods - five-year and 10-year. The five-year option won`t be offered after 1999. If your thoughts are in the direction of a five-year averaging, don`t postpone the decision for long.

The answer to the last question: Plan distributions can`t be rolled into Roth IRAs. Conceivably, you could funnel the money into a regular IRA and convert it to a Roth IRA later, in a year when your adjusted gross income won`t exceed $100,000. If you were to make the second rollover after 1998, you would have to pay full tax on the money upon conversion. But if you were to do it in 1998, you could spread the tax over four years.

Emerging markets

If your stockbroker suggests that you invest in emerging market funds, my advice is: Don`t be tempted to invest in emerging-market funds anytime soon. Business enterprises in Asia and Latin America are, for the most part, generally small and unseasoned. Also, there generally is grossly inadequate disclosure of their financial condition. This environment exposes investors to all kinds of surprises - unfortunately, most of them, as it has turned out more recently, are unpleasant.

Danger ...

Making loans to relatives and friends

Everyone thinks all doctors are wealthy and should be an easy touch to borrow money from. Beware: Making loans to your relatives and friends can cause many more problems than it solves. Before you lend money, help relatives and friends look for alternative cash sources, such as home-equity loans. If you do make a loan, attach conditions making repayment more likely. For example, if the relative or friend needs to pay off credit card debt, insist on seeing future months` credit card statements. Draw up a formal promissory note through a lawyer. Or you can purchase a boilerplate form available on legal software in a computer store. It is very important that you charge interest on the loan at market rates so the IRS does not label the loan as a gift.

Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, contact him at (800) 544-9653. E-mail: [email protected]. Web site: www.dr.hughdoherty.com.

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