Tax and loans do's and don'ts

Tax and loans do's and don'ts


Question 1: I am 27 years old and want to buy a house by age 30. I am starting to finally put a dent into my credit card debt. However I won't have money for a house down payment. Is it so terrible to buy a house with no money down?

It's great that you're able to pay off some of that debt. But putting no money down on a home is not advisable. And remember, it's not only the down payment you'll need, but also closing costs, says Greg McBride of Bankrate.com. Don't lose sight of the goal to pay off your credit cards, but make saving an equal priority. Have some of your paycheck automatically funneled into a savings account or a CD. Getting into the habit of saving is the surest way of reaching your goal.

Question 2: I have just paid off 7 credit cards. Would it be wise to close them now? Will this raise my credit score or lower it?

Good job paying off those cards. It's in your best interest to close some of those cards so you aren't tempted to run up your debt again. And although closing these accounts won't automatically raise or lower your FICO score, mortgage and auto lenders still gauge your credit risk by your credit limit. So, reducing that credit limit is a real positive. For more on what affects your credit score, you can go to myfico.com.

Question3: What is an old fashioned home equity loan and how does it differ from a HELOC?

A home equity loan is really just a second mortgage. The interest rate is fixed and your monthly payments remain the same. Taking out a home equity loan is a good move if you plan on using the money in a lump sum - like, paying for college or paying off medical debt. A HELOC - or a home equity line of credit works like a credit card.

It carries a variable rate and you can tap into it whenever you need to. You can adjust your monthly payments with a HELOC and you'll be able to benefit if interest rates decline. A HELOC can be a great way to pay for debt that comes in stages, like home improvement projects or for emergency funds if you lost your job.

Question 4:Can I take money from a taxable account and put it into an IRA to take advantage of the deduction? Then, can I put the money back into the taxable account after I've gotten my refund?

The sad fact is that you're going to pay taxes on your money sooner or later. So whether you shelter it in your IRA or you pay taxes on it now is up to you. But keep in mind that if you're younger than 59 and a half years old you'll have to pay taxes plus a 10% penalty if you withdraw money.

Gerri Willis

Auto loans: What you need to know

Common financing missteps can cost you thousands on a new or used car. Here's how to get it right.

Few of us have the means to write a check for the full amount of a new - or even used - vehicle.
Unfortunately, car buyers, treating financing as an afterthought in the car buying transaction, can easily waste thousands of dollars.
Here are some tips on what to do and what to avoid.

Know your incentives

Web sites like Edmunds.com (which provides automotive data for CNN's Web sites) list available incentives in your area. Often there are low-interest, or even zero-percent, financing deals you might qualify for.
Don't assume you need perfect credit. Ford Motor Co. (Charts), for example, has recently opened up its zero-percent financing incentive to buyers with a few potholes in their credit history.

Don't go in empty-handed
Hybrid vehicles top fuel economy list

It's true that a car company's "captive finance arm," - for example, Ford Motor Credit or Toyota Motor Credit - will probably be able to offer you a better financing deal than an outside bank or credit union. After all, it's their job to help you buy one of their parent company's products.
But that's not automatic. It can't hurt to make them work a little for your business by researching the cheapest financing you can get before you go to the dealership. A credit union or an organization like AAA or USAA can sometimes offer you access to rates you couldn't get at a regular bank.
Companies like Capital One Auto Finance will even allow you to bring a check to the dealership without having to agree to take the loan. The loan doesn't start until you write the check, which can be up to a pre-approved amount. Until then, all you've done is arranged competitive financing. You can still take it or leave it.
Just don't forget that interest rates are negotiable. If you arrange financing at a car dealership, part of that interest goes to the dealership itself. The dealership's business manager also has an incentive to work with you to earn your business.

Don't get stretched

Before you go car shopping, you have to know how much car you can afford. That means you need to know how much of a down payment you can make, how much you're likely to get for your current car and how much your monthly payments will be.
It's tempting to just let the dealership work it all out for you.
In that scenario, you tell the salesman what kind of monthly payment you're looking for and show them your trade-in. They'll tell you whether you should stick with the entry-level model or if you can move up a step or two. And you'll probably be pleasantly surprised that you can drive a much nicer car than you thought for monthly payments that fit your budget. Yes, the loan stretches out for six years but... look at this car! Feel those seats. Listen to that big, strong V8. Come on, if you can afford it each month, who cares how long the loan is?
Well, obviously, another year or two of payments means thousands of extra dollars out of your pocket. It's just being removed more gently.
Then there's another problem you might find out about years later. The longer your car loan is, the longer you'll be "upside down" in your car payments. In other words, a longer loan extends the period during which you'll owe more on the car than the car is worth.
So figure out your payment situation and know what you can afford before you start shopping.

Do your own math

Once the deal's all figured out, there's one simple step a lot of people forget to take. Get out your pocket calculator and figure out how much that car is really costing you.
Just multiply your monthly payment by the number of payments you'll be making. Then add on your down payment and the value of your trade-in. If you were fortunate enough to qualify for zero-percent financing, there shouldn't be any surprises.
If you're paying interest, especially if you've taken out a long-term loan, you might be shocked by how much that car is costing you.
For example, a six year loan at 7.9 percent on a $35,000 car would cost you almost $10,000 more than the same vehicle if you were paying no interest, according to Edmunds.com.
Then you can decide if that car is really worth almost $45,000.

Peter Valdes-Dapena