Unexpected Money!

I got a check in the mail yesterday!

I forgot that I was party in a class action lawsuit on credit card foreign transaction fees. I finally got a payout of $18.04. While it is not a lot of money it helps to offset my $22 property tax mistake.

I know I am not alone in liking checks showing up in the mail that you forgot about or did not know were coming. I certainly welcome them during this expensive month!

Using a Home Loan for College is a BAD idea!

I see a lot of advertisements from banks that encourage people to use a second home loan or HELOC (Home Equity Line of Credit) to pay for their children's tuition. To me this is a bit predatory and is a financially bad idea. I see many problems with this:

• You are borrowing against your home to finance a piece of paper
• You are responsible for the payments--not the child
• You jeopardize your savings and retirement
• HELOC's have a variable rate
• The interest is usually higher than a student loan

To borrow against your house to pay for education is a bad move. If the child does not complete college then it is wasted money you are stuck paying. If you suddenly can't afford to pay you could eventually lose your home.  At the very least you could wreck your credit for a few years by being late.

Secondly you are stuck with the payments. Regardless of what the child does in life you have to pay for it. Doing this means that you also have less money to save towards retirement and other goals since you have that extra payment each month. This is even worse with a variable interest rate that will eventually rise over time.

The bottom line: DON'T DO IT! 

I can completely understand that parents want to help pay for the child's college education. There is nothing wrong with that. By doing so you need to be smart about it. It is more than just money. Legal liabilities, consequences of it going wrong, and relationship with the child have to be considered when making this decision.

My solution: Use student loans in the child's name.

Who says you can't make payments on those loans instead? You can also make an agreement that you will pay the loans only if he/she completes their degree. If they drop out the foot the bill (or whatever other arrangement you want to make).

Advantages of using student loans:

• Once graduated they can consolidate to one payment and a fixed interest rate
• They get a tax write off for the interest on the loan
• They can be deferred during financial hardship
• If they pass away the student loans are forgiven (the home loan is not!)
• No payments are needed during school. You can save more for retirement during those years.
• The child gets a good credit from the loans.
• You only borrow what you need. Amounts available fluctuate with tuition costs. Home loans fluctuate with home values (and can be a problem!)

This need not only apply to children. You can do the exact same thing for yourself too. Making the smart financial choice makes life easier in the long run. I have student loans myself and don't regret it. They allow me to make a lot more money than I would otherwise and have a very low fixed interest rate. Make the savvy choice!

Becoming a landlord: the details

With the purchase of my new house I am essentially becoming a landlord. I just happen to live in the property I also rent out. I have been doing some research and found that I will need, at a minimum, the following items:

1. Lease from each room tenant. I plan to use the nolo.com $14.99 lease form to get started. This protects both me and the renter in a dispute and puts everything in writing.
2. Taking deposits. I plan to hold each tenant's deposit (equal to one month's rent) in an interest bearing account for the duration of the lease. Any damages at the end must be taken from this and detailed to the tenant.
   
3. Maintenance. I am responsible for making sure everything in the house is in working order. It must be safe, secure, and livable at a minimum by law. I will make sure that everyone is happy. A happy tenant is one that pays on time!

I expect to have both of my spare rooms rented out within the next couple of months. I currently have one tenant ready and am looking for another. This will definitely be a learning experience but hopefully a good one. I am also looking into more rental properties as a way to earn extra income.

I have always thought about getting into real estate and I think this house is a great first step. I got a great deal on it and there are more deals to be had. I will see how this goes and look into getting another. I have the vision and now just need the means!

Nolo.com: cheap legal documents and more!

Nolo.com is a great resource for common legal documents. They offer wills, trusts, and other estate planning documents. They also do landlord/rental documents, business documents, and even small claims and criminal documents. They also have "nolopedia" on common issues that most of us have on various subjects. Nolopedia is free to read.

They also sell software and books for creating the above documents for much less than what it would cost you from an attorney. I have personally used their LLC maker and will creation software for myself. I have had an attorney look at them and they are well done and legit. I will use them in the future for leases since I will be renting rooms in my house.

The site can also help you find an attorney for whatever law needs you may have. I also recommend calling the state bar to get a referral to an attorney for your specific needs.

Credit Cards: Adding authorized users creates liability!

I am sure some of you, as I have, get offers from the credit card companies to add a second (or even more) users to your account to earn more rewards with the card. This creates some problems:

• Trust - you are trusting another person with your account AND your credit history. This can be bad for relationships and your financial health too. You have to be very selective!
• Liability - By adding an "authorized user" you are actually adding them as a joint owner of the account. The account appears on their credit report too. If they don't pay for their purchases the creditor can come after you and vice versa.
• Risk Reduction - The creditor wants you to add users so they have someone else to go after if you do not pay. Since the account is listed on every user's credit report as a joint account they can feel the negative effects of being late. This, in effect, reduces the risk of default to the creditor.

Those are the negative parts of adding an authorized user. Their also are some positives that can come from this situation if done correctly:

• Extra Rewards - This part of their advertising is true. You do earn rewards on their purchases as well as your own. This can add up big over time and is worth it if they are responsible.
• Establishing/Maintaining Credit Score and History - Parents can use this to help establish credit for their kids. This requires a high level of responsibility on the part of the parents and the child but can be beneficial for both in the long term for their credit score. A popular choice is to do this when a child goes to college. Be very clear on the rules!
  
• Limits - Some companies allow you to set a spending limit for each authorized user. This can limit your risk in the event they do not pay. Businesses do this all the time when they give employees a company credit card.

Sharing a credit card account with someone else is a more complicated decision than it seems. Using the guidelines above you can make an educated choice on whether or not to do it. I always recommend they try to get an account of their own first and do this as a last resort.