When a HELOC rate is too good to be true
Dear Liz: My current home mortgage rate is 5%. I owe about $340,000 on the house and have about $300,000 in equity. My credit union is offering a home equity line of credit with a rate of 3%. Would it be a good idea to take out a HELOC at that rate and use those funds to pay down or pay off my mortgage?
Answer: Prevailing HELOC rates are closer to 9%, so what you saw is likely a teaser rate that would eventually expire. After that, you’d pay the regular variable rate, which would rise and fall with prevailing interest rates up to a predetermined cap, which is usually 18%.
So no, it’s not a good idea to give up your current relatively low rate. HELOCs and other variable-rate loans are a better fit for short-term borrowing that you can pay off relatively quickly.
Mortgage interest rates surpassed 7% this week, dealing another blow to potential homeowners who now face the highest borrowing costs since 2002.
Establishing credit without debt
Dear Liz: My wife and I are retired. We have always paid our credit card balances in full each month and have zero debt. A banker recently advised us to establish credit and make timely monthly payments in order to maintain a high credit rating in case we need to borrow in the future. I feel uncomfortable taking money from our investment portfolio to service debt, but I also wish to maintain our high credit rating.
Answer: You don’t need to take on debt or carry credit card balances to have good credit scores. Using a few credit cards lightly but regularly is enough.
Taking out an installment loan can help boost your scores if you’re trying to repair troubled credit. You also may need an installment loan on your credit reports if you want the highest scores possible. But the highest possible scores only give you bragging rights, not better rates and terms on borrowing.
If you’re concerned about maintaining your credit, consider monitoring at least one of your scores. Your bank or one of your credit card issuers may provide a free score, or you can sign up on one of the many sites that offer them. That will give you a better idea of how lenders view you as a credit risk and can help you see which behaviors help and hurt your scores.
If your credit score needs help, beware of credit repair companies because many are scams. And legitimate ones sell you things you can do yourself for free.
Inherited IRAs and taxes
Dear Liz: After reading your recent response on the taxability of inherited IRAs, I have a question. I am 53, divorced with no children, and have an IRA worth more than $1 million. I’ve always listed the beneficiary of the account as my estate, for no reason other than administrative ease (if I ever change my will, the IRA will follow along). However, from a tax perspective, is this unwise? In your recent response you state that non-spouse beneficiaries typically have up to 10 years to drain an inherited IRA. If these individuals don’t directly inherit the IRA, and instead it must first filter through my estate, do the payouts occur immediately and therefore create a greater tax burden that cannot be spread out for as many years?
Answer: If you die before starting to take required minimum distributions and the estate is your beneficiary, the IRA assets must be completely distributed by Dec. 31 of the fifth year following the year of your death, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Designating individuals as IRA beneficiaries rather than the estate would allow them to spread the distributions over 10 years rather than five years. If you die after starting required minimum distributions, the remaining distributions would be made according to the single life expectancy tables for someone your age, Luscombe said.
The account also could be more vulnerable to creditors, depending on state law, and could be subject to the delays and costs of probate. In other words, choosing “ease” now can create a lot of discomfort later for your heirs.
“IRAs are very difficult in probate situations, and it’s better to name individuals to be beneficiaries directly on those accounts in almost all situations,” said Jennifer Sawday, an estate planning attorney in Long Beach.
Social Security spousal benefits
Dear Liz: I qualified for Social Security and receive a benefit. My wife did not work long enough to get a benefit, yet she receives a small amount each month. What is this from? What happens to it at her death?
Answer: Her benefit is probably a spousal benefit, which is based on your work record. Spousal benefits can be up to 50% of what you would have received at full retirement age. If she started benefits before her own full retirement age, the amount would be reduced to reflect that early start. Her benefit will go away when one of you dies, and the survivor will receive an amount equal to your benefit.
Liz Weston, Certified Financial Planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.
