ø Debt Consolidation ø

The $8,000 housing credit has been extended for 2010. There are also some new credits available to people moving–even if they have already owned a home.

Given the number of homes on the market–particularly the number under foreclosure–this can be a great time to get a very good deal. Lenders are much more careful, so if you buy a house that requires some fix up, you won’t be able to take cash out at closing as you could before. Still if you have some cash on hand, buying at house that needs some tender loving care can be a great deal because many potential buyers can’t buy it and have enough money left over to do necessary repairs.

You can’t borrow against your IRA, but you can take out a certain amount to pay for your first home. The government lets you take out up to $10,000 to buy your first home. This money is taxed when you take it out (just like it would be when you retire), but there is no 10% penalty.

Combining this with the $8,000 stimulus credit that runs through November 2009, this can give you $18,000 to work with. The downside is that your IRA is probably worth less now than it was when you put the money in, so you may have to take a loss to take the money out.

Still if you find the right house, it could be a useful means of getting some extra cash together.

The government doesn’t offer a debt consolidation program where you can take all of your credit card and home equity debt and roll it all into a big low interest loan to the government. While the government is supporting banks in some situations to help them rewrite the terms of mortgages for home owners, this isn’t something you can use for consumer debt.

However the US government does offer a program to consolidate student loans. Student loans are generally considered safe because an educated person has more earning power than an uneducated person. At least that is the theory and that is why the government will offer you very good rates to consolidate your student debt into a single loan. It doesn’t hurt that many of the student loans are made by or backed by the government anyway so they don’t really have anything to lose.

If you want to find out more about consolidating student loans, checkout Direct Consolidation. It is a .gov site designed to give you the information you need to make a decision. Many of the forms and publications you can request from the government regarding this topic are available from their site as PDFs and web pages so it can save you a lot of time in doing research.

When used correctly that consolidation can be a wonderful thing. It allows you to take high interest loans and replace them with low-interest loans. This means more of your money will be going toward principal and less of it toward interest. Sounds like a good thing all around right? It is if you continue to make the same payments you made under the higher interest loans.

What gets people into trouble is when they use that consolidation as a way to increase their spending. Your goal should be to lower the amount you are spending focusing more of that money on the principle and less on the interest. If you take payments that totaled $1000 per month, and replace them with a single loan that costs $500 per month it puts you in a better financial situation. However if you use that extra $500 per month to increase your standard of living or spend money on items that may have maintenance costs, you can work yourself into a worse situation than what you started with.

The wise thing to do with the extra $500 per month is to put some into an emergency savings account and the rest toward paying off your debt. The emergency savings account will help keep you from needing to go into debt again for unexpected expenses. The extra money being paid toward the principal of your loan we’ll help you get out of debt more quickly.

Debt consolidation loans are great for people who are willing to change their behaviors that lead to the data in the first place. Debt consolidation loans are very dangerous when they allow people to continue a pattern of behavior that needs to be changed.

In the US it is easy not to take that seriously. Bankruptcy gives people an easy way out if they are unable to pay their bills. For all their problems debtors prisons did one thing right. They made people take their debt obligations seriously. I’m not against bankruptcy laws. But I am against people doing things without considering the consequences.

It used to be that buying a house was a simple way to consolidate debt as long as you weren’t too far underwater. Banks were often willing to loan of 125% of the appraised value of a piece of property. So if a piece of property appraised for $100,000 they would loan me $125,000 to buy it. If you were able to purchase the house for $50,000 that would put $75,000 in your pocket at closing.

Obviously this wasn’t very effective if you were so far in debt to the bank will loan you money in the first place. But during the housing boom house prices were expected to continue going up. Many banks assume that they could always sell the property for at least what they have loan.. That assumption turned out to be false as many banks are finding out.

Banks are now being more careful and there are many new rules they must follow. for instance if the selling price is lower than the appraised value they must use the selling price as the value of the house for determining the loan. This means that they normally can’t loan new extra money based on equity in order to fix up the house or take out cash. Conventional mortgages will generally only loan you 80% of the lower of the selling price or appraised value.

These new rules go a long ways toward protecting the bank. If you need to cash out equity on your house this can still be done but you must wait six months after you purchase the property area once the six-month period has gone by you can refinance using the appraised value of the house instead of the selling price.

This can be a very easy way to roll high interest credit card debt into a low interest mortgage. Obviously you need to be careful not to over extend yourself. But with credit card interest rates going up in mortgage rates at the lowest point in years there may be some opportunities to switch to lower interest levels.

A lot of readers want to know if they can borrow from their IRA.  This is a common question.  Most places you will find advice saying that you can’t borrow from individual retirement account.  This is almost true, but it doesn’t consider the whole picture.

The IRS is very specific that you can’t use an IRA as collateral for a loan or borrow money from it.  But they do allow you to roll the money over into another account once each year.  When you do a roll over, you have 60 days from the time you take it out of one account until you put it into the next.

So basically, you can borrow money from your IRA, but only for 60 days once each year.

Just because you can, doesn’t mean it is necessarily a good idea.  Most IRAs are invested in the stock market.  If the market is down and you pull your money out, you stand a good chance of missing out on the gain as it goes back up.  Trying to time this is nearly impossible.

For most people there are many other better options that borrowing from their IRA, but you can take a 60 day loan by using the rollover option.

Borrowing from your IRA isn’t really allowed.  There is a loop hole that will let you borrow money from your IRA for very short periods of time.  Given the current economic situation this maybe a very tempting option.  However, there is a signficant danger with trying to borrow from your retirement account like this.

The first danger is of course that you won’t be able to pay it back and will get hit with a 10% penalty from the government tax department.  However that is a smaller risk than the risk of not riding the market back up.

If your IRA is like most people’s it has lost a significant amount of value in the last 6 months or so.  Pulling the money out now menas that you will lock in those losses.  If you don’t get the money reinvested before the market goes back up, you will stand to lose a lot of money.  In most cases you’ll lose significantly more than the amount of taxes that would be due on the money.

If you are in debt and can’t find a way out, pulling out your IRA investments should be the absolutely last resort in this market.  Make sure you have exhausted all of your other available options before considering such a move.

American Express has been dropping some of their customers.  Here are a few examples that I’ve heard of happening.

One customer was in Europe on vacation and their Amex card stopped working.  They finally got ahold of American Express and discovered that their account had been canceled.  They never were given a good solid reason.

A business customer was planning on using the “pay over time” option that American Express has, to help cover a cash flow problem for a month.  (American Express normally expects people to pay the balance each month, but they sometimes offer the ability to pay over time for certain items.)  However, when they got their bill they couldn’t find the pay over time option.  It turns out American Express had just dropped that from their account (again for no good reason).

I know AmEx was also sending people letters telling them that if they paid off their balance and closed their account they would get a free $250 gift card.  It wasn’t clear, but it sounds like these may have been send to people who American Express determined  to be at risk of not paying in the future.  The idea may have been that $250 was a small price to pay to get them to move the balances to other cards so when they did stop paying American Express wouldn’t be out the money.

First time home owners can get $8,000 from the government for buying at house in 2009.  And it isn’t just for first time home owners.  If you haven’t owned a house in the past three years you qualify.

The $8,000 is the maximum amount of the credit.  If you buy a house for less than $80,000.  You will only get 10% of the purchase price.  You can also use it for building a house, but you have to move in by the end of 2009 in order to get the tax credit.

The money comes as a refundable tax credit.  This means that it comes off the amount you own on your taxes.  So if you owe $10,000, you will only owe $2,000.  The “refundable” part means that you get it even if you don’t owe any taxes.  If there are no taxes for it to wipe out, the government will just cut you a check.

I wouldn’t go out and buy a house just to get the money from the government, but if you are looking for a place to buy this can be added incentive.

With the current financial crisis, many people are looking for ways to use the money in their IRA and 401k plans to help with current expenses.  There is a way to borrow from an IRA for 60 days, but keep in mind that if you are unable to pay the money back you will be hit with tax penalties.

Also since most IRAs are lower in value than they were a year ago, chances are you may lose money.  In the end it is better to cut expenses and look for other sources of cash and just leave your retirement accounts alone.

401k account often have a way you can borrow money from them for longer periods of time, but even then they may be a poor choice.  Once you pull the money out you may miss the growth of the market going back up.