Decision on Refinancing Could Be Question of Risk
Question: My 18-year-old son has been at a private high school that is also a residential treatment facility in Texas for the last year. I financed his tuition and treatment with a $62,000 loan. The variable interest rate is tied to an index that just jumped to 8.48% in April.
This is not a federal loan. I am making payments monthly. My question: Should I refinance this loan with an 8.5% fixed-rate personal loan or stay with the variable rate? I’m not sure what factors influence the Libor index, so I don’t know whether to stick it out with the variable or refinance.
Answer: Libor stands for the London interbank offered rate. It is often used as an alternative to the prime rate and appears to be affected by many of the same factors. That said, I can’t predict interest rates. If I could, I’d probably be off somewhere investing my own money, not advising you about yours.
To answer your question directly, is an 8.5% fixed rate better than an 8.5% variable? Think Dirty Harry. Do you feel lucky? Certainly in today’s environment, a fixed rate feels more comfortable. But if recessionary pressures return, rates could ease and then you’d want to refinance.
Instead of trying to predict the direction of rates, look at your personal situation. Would a rate hike put you on the financial edge? If so, get the fixed rate. If not, you can decide whether you want to gamble.
One more option to consider is a home equity loan or line of credit. Home equity loans can be fixed-rate or variable, but because they’re secured by your residence, they’re likely to be offered at a somewhat lower rate of interest. Also, federal tax laws allow you to deduct home equity interest of as much as $100,000, no matter what the money was used for.
That makes borrowing against your home a comparatively better deal than a simple personal loan. The one downside: When you’re putting your home up as collateral, you’d better be pretty certain you can pay off the loan.
Why Employers Push 401(k) Participation
Q: It seems that all companies that offer 401(k)s really want employees to participate in them. Why? What’s in it for them?
A: Most employers offer to kick in 25 cents to $1 for every dollar that the worker contributes to the 401(k) plan. They consider that a great benefit and can’t imagine why anyone would turn it down.
But there is another reason.
Federal laws bar companies from handing out these benefits just to their top earners. So there are so-called anti-discrimination tests designed to ensure that the top brass doesn’t get a disproportionate share of 401(k) matching contributions and benefits.
Your bosses want you to contribute so that they too can contribute.
Weighing Options for Financing a Remodel
Q: Together my wife and I make a generous salary and we save a lot for retirement -- about 15% of my pay and 25% to 30% of my wife’s.
Last year we had an opportunity to buy a house on a lake. We’ve been able to make the payments with some basic lifestyle changes and without altering our retirement savings plan.
Here’s the problem: We eat out all the time because we hate our new kitchen -- or at least that’s our excuse.
We’ve looked into remodeling, and the cost is going to be $40,000 to $60,000. My question is about the options for financing it. My wife and I have different ideas.
We have four possible sources of funding:
* $60,000 in company stock that was bought through my wife’s employee stock purchase plan. The company is solid and doing quite well.
* A $50,000 home equity line of credit that we get at 1 point above prime.
* An interest-free loan of as much as $25,000 from our parents. (Yes, we would be paying it back at some point.)
* $15,000 in passbook savings as a rainy-day cushion.
My wife’s thought: Take advantage of the interest-free loan and finance the remainder by selling stock. Her thinking is that the money is there, so why not use it? We wouldn’t go into debt, and ultimately we’d add value and enjoyment to the house.
My thought: Take advantage of the interest-free loan and finance the remainder through the home equity line. My thinking is that we’ve got a good discipline going with the company stock and we shouldn’t mess with that. Also, it’ll make it hurt a little more and remind us of the lifestyle changes we promised to make, like not eating out as much. Besides that, we’d be able to deduct the interest on the home equity line.
Which option seems best? Should we just continue to eat out and let the kitchen gather dust?
A: I like your wife’s plan for two reasons: I hate debt, and from a diversification standpoint, it’s not a great idea to have your job and a large portion of your stock portfolio locked up in the same company.
But by all means eat out less.
Just kidding. Eat out as much as you like. When you’re saving prodigiously and still have enough to live the way you want, live the way you want. Stop feeling guilty, for heaven’s sake. What’s the money for, anyway?
Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For previous columns, visit latimes.com/kristof.
