Mailbag for Friday, June 1, 2007

Chris Farrell answers your financial questions.

TESS VIGELAND: Hello, everyone. I'm Tess Vigeland. And this is the time in the show when we turn the microphone around to hear from you. Our economics editor, Chris Farrell, is here to help. Hey, Chris, how are you doing?

CHRIS FARRELL: I'm doing well. How are you?

VIGELAND:
Doing well, thank you. But before we get into answering some questions, let's ask everyone to take down our Web site address. It's Marketplace.org. Click on the contact button there. Or you can give us a call. It's 877-275-6669. That's 877-ASK-MONY, and we spell that M-O-N-Y. All right. Let's go to our first caller. Lucia is in Cambridge, Mass. Hi, Lucia.

LUCIA:
Hi. How are you doing?

VIGELAND:
Very well. And you?

LUCIA:
I'm doing well.

VIGELAND:
Terrific. What do you do there in Boston?

LUCIA:
I am a schoolteacher.

VIGELAND:
Oh, terrific. What age?

LUCIA:
Fifth grace.

VIGELAND:
Excellent.

LUCIA:
Yeah.

VIGELAND:
And what's your question for Chris today?

LUCIA:
This is my question. We own a two-bedroom condominium outside of Harvard Square, and we would like to buy a larger home since we have a 2-year-old, and we would like to keep this place as a rental property. So, my father offered us some money to help us keep this place and buy a new place. So my father has given myself, my husband and our 2-year-old each $12,000, and my stepmother has also given us each $12,000. But our goal is $100,000. So my question is can my father give the money to my 18-year-old brother and then have him gift it to us?

VIGELAND:
First of all, who do we have there in the background with you?

LUCIA:
Can you hear my 2-year-old?

VIGELAND:
Yes.

LUCIA:
Yeah. And he'd like more chicken nugget. He's having lunch.

VIGELAND:
Well, I certainly understand the need for chicken nuggets.

FARRELL:
That was not, absolutely. Well, when the money is gifted to your brother...

LUCIA:
Mm-hmm.

FARRELL:
...the way the gift works, he can then do whatever he wants with it, OK? So it's his, and that's the only way it works. Nobody has any control over what he does with that money. Otherwise, it's disqualified by the IRS. But I have another suggestion to make. Parents are increasingly, or relatives are increasingly doing also what's called a shared-equity mortgage. Let's say, you know, we're just making it all simple as forget about the gifts just for a moment. They lend you $100,000. You put that into the down payment. Then, when you sell your place, you get your $100,000 back, plus a share of the profits.

FARRELL:
One reason why I'm just mentioning this is that there are a lot of parents out there who are well-off, but they're not wealthy. I mean, gift is a little more than they really want to afford, considering their overall estate planning and retirement planning. This is an option that says you can still help out your daughter or your son-in-law, or whomever, you are helping them out, you're doing a real benefit for them. It's a legal document. But, you know, after five, seven, 10 years, depending on whatever you negotiate, you know, they're gonna get a little bit of return and, you know, maybe, they could have done better in the stock market.

FARRELL:
But they're not doing this to make a huge sum of money, but to get their $100,000 back, plus some percentage of the appreciation in the property. It's not a bad deal for everybody.

LUCIA:
OK. So this is called a shared-equity fund?

FARRELL:
No, a shared-equity mortgage, shared-appreciation mortgage. There's a number of different terms.

VIGELAND:
Chris, let me just go back and make sure for the audience that we understand that getting all of these $12,000 gifts from different family members and going to different family members, all of that is legal.

FARRELL:
The only one, I mean, the one that she described, once you get to the, the, I mean, the 18-year-old brother, he can gift it. But again, remember, he, the parents can't gift it to him with the expectation that he's going to gift it to his sister. But if you, if they gift him $12,000, and then he wakes up in the morning and says, I got a brilliant idea. I'm gonna gift this to my sister, I don't see what would stop him.

VIGELAND:
All right. Does that help you, Lucia?

LUCIA:
It does. It does. Thank you so much for your help. I'm sorry about all the background noise.

VIGELAND:
Not at all.

FARRELL:
Not at all.

VIGELAND:
Did your 2-year-old have a question for us?

LUCIA:
No. I think, I think he's, yeah, he wants to load a single called Free to be You and Me.

VIGELAND:
Well, Chris, I'm gonna speak for the two of us and say that the 2-year-old male listen to Free to be You and Me.

LUCIA:
OK. Thank you. OK. Bye.

VIGELAND:
Thanks for the call. All right, Chris, well, you and me are free to answer more e-mails. You ready for this?

FARRELL:
All right. All right. Can I groan?

VIGELAND:
Here we go.

FARRELL:
Can I groan a little bit on that one? I'd like to, thank you.

VIGELAND:
Yes, you have my permission. Frank Rudin (PH) from Crawford, Florida. And he's got some stock in a media/cable company called ION, ion, and he was just notified that the company is offering to buy out all the stock. He's never been in this situation before. What should he do? If he doesn't take the offer, does he lose the stock, anyway? Does it become worthless? What if everybody else takes the buyout and he's left all by himself? This is certainly not an uncommon thing to happen, so what's your advice?

FARRELL:
It turns out ION is a, it's a media company with about 60 television stations, and they're being bought out by NBC, Universal and a private equity firm, and they got a offer there, and you just tender your stock, and you get your cash for however much stock you have, and then reinvest it in the market.

VIGELAND:
And it's not like there's an option of not doing this, right?

FARRELL:
No. There is no option. I, you know, for you and I and Frank, you know, we're, we're, you know, we're the small investors. We don't really count.

VIGELAND:
Right.

FARRELL:
We go along for the ride. Now, maybe there's another hedge fund that will come along, or another company will come along, and they'll say, we think that price is too low. We just go along for the ride.

VIGELAND:
All right. Well, there you go. Short and simple.

FARRELL:
The investor, the Investor Relations Department will send them all, and it sounds like he already has the information. But they send them all the information and, and how to do it, and all the brokerage houses know how to do it. So it's a fairly simple process.

VIGELAND:
All right. Well, there you go, Frank. Hope that helps. Have no fear, dear listeners, if you're completely in the dark about a financial situation. We're here to come to the rescue. Click on the contact button on our Web site, Marketplace.org, or call us at 877-275-6669. That's 877-ASK-MONY. Let's go to the phones again. We've got Elizabeth on the line from Savannah, Georgia. Hi, Elizabeth.

ELIZABETH:
Hello.

VIGELAND:
How are things there in Savannah?

ELIZABETH:
Quite warm right now. We're having a drought.

VIGELAND:
Are the magnolias out?

ELIZABETH:
The magnolias have been out for some time, and some of them are dying because of lack of water.

VIGELAND:
Really?

ELIZABETH:
Yeah.

VIGELAND:
Oh, how sad. Well, let's talk a little bit about your question for Chris today. I understand that you and your husband have lived in your home for a good amount of time. How long?

ELIZABETH:
Almost 20 years.

VIGELAND:
Twenty years. Terrific. And you're close to paying it off. Good for you.

ELIZABETH:
Yes.

VIGELAND:
So what is your specific question for Chris?

ELIZABETH:
Well, you know, we've been on house tours of museum houses down here, where they show us that people in the old days used to buy a crystal bowl or a clear bowl and put it on the banister to show people that the mortgage had been paid when they came to visit. But we don't have a banister or stairs, and we also don't know what we are, should be keeping to tell everybody, our daughter included when she's older, what kind of mortgage she's inherited?

VIGELAND:
OK. Terrific. Well, Chris, I suppose that you, the easy solution will be to buy a crystal ball.

FARRELL:
I, I was just gonna say, that's exactly. It's a happy day. I think that's one of the great days in the lives of most Americans, when they get to own their home free and clear. There are two key legal documents that you signed when you were in that room signing all that stuff involved in getting that mortgage. Do you remember that?

ELIZABETH:
Yes. In fact, I have an inch and a half of it, and I'm wondering what to keep.

VIGELAND:
Wow.

FARRELL:
Exactly. So, but there are two really key documents. One's called the promissory note and one's called the deed of trust. And what you want back from your lender is a marked documents that say, you know, we stamped, paid and cancelled. That's the phrase that you want. And the other thing is that paid and cancelled phrase has to be recorded with the state. Some lenders are very good and, by the way, they'll let you know, some lenders are very good, and they'll contact the appropriate recorder of deeds. Other ones will say congratulations. This is . . . paid off your mortgage. Oh, by the way, don't forget to contact the recorder of deeds.

ELIZABETH:
Oh, but they will tell me whether they've done it or not?

FARRELL:
Exactly, so...

ELIZABETH:
OK.

FARRELL:
...it's your obligation, though, is to make sure the release from your mortgage is in the official records.

VIGELAND:
Chris, what about the actual title to the house? Do you get something in paper that says, congratulations, you own this thing free and clear?

FARRELL:
That is really the, you know, I said, there are two documents, the promissory note and the deed of trust. What you're really talking about is that deed of trust.

VIGELAND:
OK.

ELIZABETH:
Deed of trust is the same thing as title, then?

FARRELL:
Yeah. Basically. Yep.

ELIZABETH:
OK.

VIGELAND:
I have to ask you, I've heard of people holding mortgage-burning parties once they paid off the house. Do you have any plans to celebrate this somehow?

FARRELL:
No. No. Do not burn the mortgage. No.

ELIZABETH:
No. I think I'll...

FARRELL:
The moral of this whole conversation is don't burn the mortgage. Have it released...

ELIZABETH:
I'll scan the mortgage, and put it on the disk with the other things for when...

FARRELL:
Exactly.

ELIZABETH:
...when we have to flee from a hurricane.

VIGELAND:
There you go.

FARRELL:
Have everything recorded with the state. Have it released from the land records, instead. You don't want to burn the mortgage.

VIGELAND:
All right. Well, maybe you can have a rain party, you know, and turn the sprinklers on or something.

FARRELL:
I know, Tess, I rained on your parade. But you got to...

VIGELAND:
But your water authority would be very displeased with me. So, well, I hope that has helped you out with your question. And Chris, I will take my slap on the hand, and discourage anyone from ever having a mortgage-burning party.

FARRELL:
Thank you.

ELIZABETH:
This is very helpful. Thanks so much.

VIGELAND:
OK. Thanks for the call.

ELIZABETH:
OK. Bye-bye.

VIGELAND:
Well, Chris, as I said, I've heard of a lot of people who have these mortgage-burning parties. And, yes, you know, you don't burn every single piece of paper. You have to prove that you paid off your mortgage. But I'm gonna issue a call to listeners to ask, if you have paid off your mortgage, and you had a mortgage-burning party, and then, later on, you tried to sell your house and you had trouble because you didn't have all the right papers, write in and let us know about that. We wanna hear your stories. Well, most people are really concerned about getting rid of those pesky bills, including mortgages, but after you pay them off, what's next? Give us a call. We'll shed some light on it. It's 877-275-6669. That's 877-ASK-MONY.

VIGELAND:
Or visit our Web site. It's Marketplace.org. Click on the contact button. This is Marketplace Money from American Public Media. All right. Let's hit the e-mail bag again. We've got Hyrem writing in from Highland Park, here in California. And he's done something quite commendable. He purchased a savings bond every payday for 25 years.

FARRELL:
Whoa.

VIGELAND:
Can we give him a hand?

FARRELL:
Absolutely.

VIGELAND:
Well done. Well done. He intended to roll over E and EE bonds to HH bounds, and we'll explain all this in a moment, to provide some retirement income.

FARRELL:
Right. You'll explain it in a moment. Yeah. Go ahead.

VIGELAND:
No. No. No, my friend. You will explain it. Now that HH bonds have been discontinued, what can he do with these bonds, some of which are maturing, to give him some income without getting taxed to hard? So, first of all, let's talk about, very briefly, some of the differences between all these different kinds of bonds. What's an E versus a EE versus HH?

FARRELL:
All right. Let's go with the, the E, the EE, that is your classic savings bond. You put down $25, and it's worth $50 over a period of time. You don't pay taxes until you cash it in.

VIGELAND:
What happened to A, B, C, and D?

FARRELL:
I have no idea what happened to them. But let's go to the HH.

VIGELAND:
OK. HH.

FARRELL:
With the HH, it used to be, you would take your, say, your EE or your E, roll them over to H bonds. And with those who are called current income securities, they would pay you an interest payment until maturity redemption. It was a way of getting income off of to these things, and they discontinued. It's, actually, I think, a good thing they discontinued them.

VIGELAND:
Why?

FARRELL:
Well, it was so low.

VIGELAND:
Oh, the interest rate was so low?

FARRELL:
You could just do so much better. It was sort of an older generation, like them, because there was a certain amount, there's a lot of security to them, but you really paid a big price. It was not a good deal.

VIGELAND:
All right. Well, Hyrem was hoping to get into these HH bonds. They're no longer there, so, what can he do with the E and EEs so that he can get some income without this big tax hit.

FARRELL:
There's a little bit of tax management going on here.

VIGELAND:
Mm-hmm.

FARRELL:
But I would be selling them for current income, you're gonna buy a car. You know, whenever you sort of need your current income to maintain your standard of living, but you still got the time when you're going to pay the tax. If this is a good year for you to cash in some of the bonds and pay the tax, you've got a need there, or your tax rate is very well, then go ahead and do it, and that's how I would use them. But you will be paying income taxes when you cash them in.

VIGELAND:
Well, good question. Thanks for that, Hyrem. And, unfortunately, those are all the questions we can take on this week's show. Please leave your question for a future program on our voicemail. We're at 877-275-6669. That's 877-ASK-MONY, M-O-N-Y. Or visit our contact page on our Web site. It's Marketplace.org. Thanks so much, Chris.

FARRELL:
Thanks a lot, Tess.

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