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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75650  
Subject: Re: Advice from financial planner Date: 9/26/2000 6:11 PM
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jrp210: <<<<I am married with a one year old boy. My wife and I recently went to a financial planner to set up strategies to have enough money to put our son through college and have enough for retirement. We both contribute $2000 each to Roth IRAs each year. I contribute the max to our 401k and my wife contributes the max to her SEP.

We have a house that is valued at roughly $125,000 with a mortgage of $76,000 (7.5% interest rate). Our only other debt is an auto loan that is $14,000 that will be paid in full by 2002.

The total monthly payments for the house and car total $1,080.

The planner suggested we refinance our house for $96,000 at a rate higher than what we have currently (8.375%), use $14,000 to pay off the car and use the remaining amount to put in a mutual fund. Our total monthly payments will then be $750 a month compared to $1,080 but we won't have as much equity in our home. The difference in the monthly payments - $330 (1,080 - 750) would then be invested in the mutual fund each month.

Its sounds logical but my gut says otherwise. Has anyone heard of this or done this themselves?>>>>

RiverCityFool: "And does he broker the loan and sell the mutual fund?

I'd try running some numbers -- how much more would you pay in interest? This might be a deal that does give you some $ upfront and cost you a lot more over the long haul.

I'd say a better strategy would be to put any money you can spare toward making sure you have an emergency fund, paying the car off more quickly, and then starting an index fund."


I am with RiverCityFool, but you planner sounds like a student of Ric Edelman -- a big proponent of as big a mortgage as possible and never paying it off.

You did not say how old your existing mortgage is, but refinancing for 30 years would also reset the clock (likely extending the total number of payments that you would still need to make).

Also, increasing the the rate on the existing 76k by 7/8 seems foolish (note lower case f) to me; and rolling the car balance into a long term loan (and one secured by your house) seems even more foolish to me; you will still be paying for this car long after it is gone if you follow the planner's advice.

Run your own numbers, and in addition to monthly cash flow, also look at net worth (which will depend partly upon your assumed rate of return and your tax bracket)and total interest paid.

Just my $0.02. Regards, JAFO

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