Dear Liz: My wife and I had two houses built for resale. Then, as you know, things went bad. The construction loans were continued at 7.75% and we finally rented the homes, but the mortgages are costing more than we’re getting in rent. To refinance, we would have to pay down each loan by $100,000, because the homes have fallen in value and lenders are more conservative.
I am thinking of threatening to walk. Our credit would be impacted, but I am over 70 and do not plan to do a lot of borrowing, so that does not seem to be an issue. I do make enough to keep this going but do not want to. Please advise.
Answer: Walking away from these mortgages would trash your credit, but you may face a much bigger problem: The lender could sue you for the balances you owe. Some states protect borrowers from such lawsuits when the loans are secured by primary residences, but the protection doesn’t extend to investors.
You may want to talk to an attorney familiar with debtor protection in your state (a bankruptcy attorney might be a good choice) to get an assessment of your risk. You also should discuss your overall financial situation with an experienced, fee-only financial planner. The planner could help you assess whether sinking another $200,000 into these properties might pay off in the long run.
Clearing up credit card law
Dear Liz: My wife and I are trying to pay off our credit card debt. We have several balances on one card with interest rates ranging from 3.99% to 27.99%. My understanding of the Credit Card Accountability, Responsibility and Disclosure Act was that after Feb. 22, any credit card payments would be applied to the balance with the highest rate.
I recently discovered our credit card issuer has been applying our minimum payment to the lowest rate first, before directing the rest toward the highest-rate balance. Does the CARD Act allow this?
Answer: Before the CARD Act went into effect, many credit card issuers applied customers’ payments to the lowest-rate balances on their cards so that their highest-rate balances would continue to accrue interest longer. People who took advantage of low-rate balance transfer offers and then charged other purchases often discovered that their payments quickly paid off the 3.9% balance transfer offer, while their purchases continued to cost them 20% or more.
Early drafts of the CARD legislation would have required issuers to apply borrowers’ full payment to the highest-rate debt, but by the time the law was passed, that language had been changed to say that any amounts above the minimum payment would be applied to the highest-rate balance. Issuers can apply the minimum to whatever balance they like, and many continue to apply it to the lowest-rate balance on a card.
If your balances are accruing different interest rates on the same card, you may be better off transferring the debt to other cards that each carry a single interest rate. That way, you’re the one deciding how your payments are allocated.
How to keep free checking
Dear Liz: I’ve been reading a lot lately about how banks are going to do away with free checking. I’m on a fixed income and can’t afford to pay a bunch of fees. What can I do?
Answer: First, scrutinize every mailing and e-mail you get from your bank to learn about any changes that might be coming to your account. Many banks will still allow you to avoid fees by keeping a minimum balance, arranging a direct deposit or making a certain number of debit card transactions.
If you can’t modify your banking habits to avoid the fees, consider switching your account to a credit union. These member-owned institutions are likely to continue offering free checking or to at least make it easier to qualify. You can search for credit unions for which you might be eligible at https://www.findacreditunion.com.
Liz Pulliam Weston is the author of the book “Your Credit Score: Your Money and What’s at Stake.” Questions for possible inclusion in her column may be sent to 3940 Laurel Canyon Blvd., No. 238, Studio City, CA 91604, or via the “Contact Liz” form at https://www.asklizweston.com. Distributed by No More Red Inc.