I recently received an e-mail from a reader named Steve. For background, he’s 30 years old and has only recently started getting his financial house in order. Over the past six months, he’s built up a $2k emergency fund at ING Direct, and he’s been working to reduce his debt. That being said, he still has a decent chunk of credit card debt (around $14k) plus student loans ($9k) and a car loan ($9k).

Here’s his quandary:

My question is whether I should buy a house right now, or wait until I get married in a year or so. My thoughts revolve around two scenarios:

1. Continue saving, so I can buy the ring, pay off some credit card debt (I have about $10k), be prepared to pay for the wedding, and hopefully have enough for a down payment for house after the wedding.

2. Exhaust my savings and buy the house, which puts me basically on a month-to-month budget until I get married. This month-to-month still includes paying down my credit card debt at the same rate I’m doing it now.

My concern is that by next year, interest rates will be back up, and that if I wait until then, I’ll have lost money in the long term due to $200k on 6% versus 7%. But, if go that route, then I’ll probably end up financing a ring, a wedding, and a honeymoon — something which sounds quite bittersweet.

If I were in this position, I’d focus on debt reduction (check out NCN’s e-book on the topic) as well as building up some additional savings rather than rushing into the housing market. What better gift can you give to your future bride than a clean financial slate with a sizable buffer?

Not only would buying the house wipe out his financial cushion but, by his own admission, it would force him to take on even more debt down the road. To me, this has penny wise and pound foolish written all over it. And what’s going to happen when the air conditioning breaks down or the roof needs to be replaced? Mr. Murphy has a habit of visiting at the most inopportune times.

As for the direction of interest rates, who knows? In fact, a similar (albeit opposite) argument could be made about the direction of the housing market. Who’s to say that prices won’t continue to slide over the next year? Here again, your guess is as good as mine.

Why not focus, at least initially, on things that you can control? Things like debt reduction, building up that emergency fund, and/or saving up for a down payment. The interest rate concerns really boil down to a fear of the unknown and, while such concerns are understandable, it seems that the decision to buy a house should be based on far more than this.

What do you guys think?

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A reader named Tony wrote it with the following question:

My grandmother found among her papers a certificate of deposit (CD) from 1984, with a 9.5%(!) interest rate. The bank, of course, is no longer around. Is there any way to find out how to claim this? What would you do?

Short of trying to figure out if the bank has been bought by someone else, I’m afraid that I don’t have a good answer for him. What if the bank went out of business? Is there a statute of limitations on FDIC insurance? How would one go about trying to get their money back? I’m not sure. I therefore thought that I’d throw this out there so you guys can take a whack at it. If you have any suggestions as to how to proceed, please post them in the comments.

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A reader recently wrote in with what he termed a “complex question” about creative strategies for debt reduction.

My wife and I have FICO scores around 750. We have about $28K of debt on top of $238K in two mortgages (191K & 47K). The first is at 5.75% for another 5 years, while the second is at 11.25%. I just thought about loaning ourselves the $28K from our 401K in order to pay that portion of the debt off (temporarily), closing all open credit lines, then applying for AmEx cards that offer 4.99% lifetime rate on balance transfers in order to balance transfer back the $28K plus some of the second mortgage. Now the questions… How long would the loan be necessary before applying for the cards to ensure maximum credit from AMEX? How much credit might we expect?

First of all, it’s nearly impossible to predict how long it will take to secure new cards and get the balance transfer to come through. In fact, nothing is guaranteed, so there’s a risk of not being able to get enough new credit to pull this off.

Setting those issues aside for the moment, I’m not sure that cancelling the cards is the best course of action. Since he and his wife have high credit scores, it’s possible that they’d be able to get low (or no) interest balance transfers straightaway, without having to play games with their 401(k). This would also circumvent the risk of borrowing from the 401(k) and then being unable to come up with funds to pay it back.

Another strategy would be to apply for one or more 0% balance transfer credit card offers up front. While these offers won’t necessarily provide 0% for life, there are a ton of 12 month offers that can be rolled over to a new offer if/when they expire. These funds could then be used to kill off the high interest credit card debt as well as a portion of the second mortgage. The key here is to avoid piling up more debt while trying to dig themselves out from under. Moreover, you need to be dedicated to paying it off aggressively – you can’t borrow your way out of debt, but you can minimize your costs while paying it off.

Of course, the above depends on their ability to secure the additional low interest credit. But with high credit scores, they might be able to do it. A final tip would be to time the additional credit applications to happen on the same day. The prevailing wisdom is that this will increase their odds of getting the credit that they need, as the left hand (one card issuer) won’t necessarily know what the right hand (another card issuer) is doing.

If you have any thoughts on the above situation, feel free to share them.

This article is part of my Money Q&A Series.

Photo Credit: Brett L.

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A reader recently wrote in with the following inquiry:

I am looking to pay off a student loan of just under $22,000 and saw that I can borrow from my IRA to pay for school without incurring the added 10% tax penalty, would this also apply to paying off a student loan? This is a private loan not federal and my rate is around 10%, it’s adjustable. What do you think I should and can do?

The ability to use IRA funds to pay for Qualified Higher Education Expenses (QHEEs) without incurring the 10% penalty is described in Chapter 9 of IRS Publication 970. As far as I can tell, the Qualified Higher Education Expenses don’t include student loan repayment. Rather, qualified expenses include things like tuition, mandatory fees, books, supplies, equipment, and room and board. Based on that, it seems that you can’t use IRA funds to pay off your student loans (at least not without incurring the 10% penalty).

The one obvious exception to this is Roth IRA contributions (but not earnings), which can be withdrawn at any time, for any reason, without penalty. Note that I’m not saying this is a good idea, I’m just saying that it’s possible.

Also, just to clarify something from the original question… You’re not really “borrowing” when you take a qualified distribution. You’re making a withdrawal, and the only way you can put the money back in (short of sticking the money back in within 60 days) is by making regular contributions, which are subject to annual limits as well as income restrictions.

Of course, I’m not a tax expert, so it might be a good idea to run this stuff past a pro before acting on it.

This article is part of my Money Q&A Series.

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I just received an interesting question from a reader that relocated from New York to Denmark in 2003. They have since decided to make the move permanent, and have a question about using IRA funds to help with the purchase of a home overseas:

“Can we withdraw from our traditional IRAs to use as a down payment on a house (we are first time buyers) if that house is in another country? I know that you can do this in the United States, but am curious if we can withdraw the money without penalty if our first time purchase is overseas? Any help would be greatly appreciated!”

Let’s first set aside the issue of whether or not using IRA funds to purchase a house is a good idea. Rather, let’s take a look at the rules…

Ever since the 1997 Taxpayer Relief Act went into effect, people have been able to withdraw up to $10,000 from their traditional or Roth IRA to assist with first-time homebuyer expenses. Moreover, Roth IRA contributions can be withdrawn at any time, and for any reason, so this limit really only applies to earnings in your Roth IRA. Qualified first-time homebuyer withdrawals are potentially subject to taxes (if they represent pre-tax contributions to a traditional IRA), but are otherwise penalty-free.

So what about the issue of doing this overseas? I haven’t actually been able to come up with an authoritative answer. I looked at IRS Publication 590 as well as the instructions for IRS Form 8606 and didn’t see anything the specified where the home has to be. While my knee-jerk reaction would normally be that the home would have to be in the United States, there was a recent discussion on the Get Rich Slowly forums where this topic came up. Here’s the critical bit of the discussion:

“The interesting twist in all this is that your first home can be anywhere in the world. I couldn’t find anything in the code that explicitly addressed this so I called the IRS and spent quite a while on the phone with them; they called me back and said they couldn’t find anything that would prevent my from using my Roth IRA to help my buy my first home in Canada, and the spirit of the law is more to encourage home ownership among Americans rather than specifically for people to buy homes in America.”

Keep in mind that a forum discussion isn’t exactly authoritative when it comes to IRS rules, so… Unless someone around here can provide an authoritative answer (backed up by IRS documentation), I would recommend calling the IRS and verifying this before using those funds.

This article is part of my Money Q&A Series.

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A recent search engine visitor asked:

Who gets to keep the earnest money a real estate deal falls through?

My answer: While I’ve talked in the past about the cost of a failed house deal, I’ve never really dealt directly with the issue of earnest money. In case you’re not aware, the whole point of earnest money, which a prospective buyer typically pays to the seller when they make an offer on a property, is to ensure that the buyer is serious, and intends to go through with the deal. Thus, if the buyer backs out of the deal, the seller gets to keep the earnest money. If the deal goes through, the funds are applied to the purchase at closing.

Of course, there are possible exceptions, like when the buyer makes their offer contingent on securing financing, the outcome of the home inspection, etc. But for the most part, if a deal falls through and it’s the buyer’s fault, the seller keeps the cash. Of course, the seller could also try to sue for ‘performance’ (i.e., to make the buyer honor the contract) but the most common thing to do is pocket the earnest money and put your house back on the market.

This is something to keep in mind when deciding whether or not to accept an offer on your home… If the prospective buyer offers a relatively small amount of earnest money, they might not be as serious as you had hoped. In that case it’s probably a good idea to ask for more in a counteroffer. Around here it seems that ~1% of the offer price is standard. From the seller’s perspective, more is always better (and vice versa for the buyer).

This article is part of my Money Q&A Series.

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In looking at my site stats, I’ve noticed that a number of people arrive here from search engines looking for answers to fairly specific question. In some cases, those answers can be found in one or more articles within my archives, but in other cases they can’t. Thus, I’ve decided to periodically pluck out some of these questions and spend a bit of time answering them.

Alternatively, if you have a question that you’d like for me to answer, please drop me a line. I love getting e-mail from readers, and I’m also always on the lookout for good article ideas. I can’t promise that I’ll tackle your question, but we’ll do our best to accommodate your interests.

As always, these articles will be categorized by subject matter, but they will also be cross-referenced in the Money Q&A category.

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