Smart Money: Consolidating via equity loan calls for discipline

Dear Bruce: You have written in your column many times that you feel home-equity loans are a bad idea for debt consolidation. I see a lot of advertisements out there for companies promising to help people get out of debt. With a current income of $35,000, I have $17,000 in credit-card debt and I am having difficulty meeting my monthly payments. -Reader, via e-mail

Dear Reader: The reason that I am not in favor of home-equity loans is that you are taking short-term debt - i.e., credit card and short exposures such as vacations, clothing and meals - and financing it for as much as 15 years. That makes no sense to me.

If you have the discipline, however, to borrow the money and pay it back in four years at the maximum, I would say go for it. In all likelihood, the money you borrow on the home will be tax-deductible. As to the debt-consolidation companies and the nonprofits, generally they will not work with you unless you are behind in your payments. You surely don't want to do that unless absolutely necessary.

Given that, if you do have the absolute discipline to retire the home-equity loan in 48 months, that is the route I would go. Just remember one thing: Money is going to be hard to get these days and if you can't find a loan, the only reputable debt-consolidation company is the Consumer Credit Counseling Service.

Pros and cons of rentals

Dear Bruce: You have said that when your rental properties are paid for, you should sell them. You have also said that single-family rentals are generally poor investments. Why? -Reader, via e-mail

Dear Reader: I think that you have paraphrased me with a slight error. What I have said is that, if you are a professional real estate investor, you shouldn't "own the property." You should have as large a mortgage as possible, reinvesting this capital in yet more rental properties. When your actual ownership exceeds 30 percent or 35 percent, in my opinion, it is unwise to continue with this much equity. You are far better off to refinance it and leverage the same amount of money into controlling much more real estate. The professional investor usually follows this plan.

As to the single-family homes, more often than not, they will bring more on the marketplace in terms of price than a rental can justify. Often, a house that sells for $100,000 can be rented for $700 to $800 a month. Clearly, this is not enough. There are those exceptions to the rule when that same $100,000 house might rent for $1,300 a month, but they are rare. Generally speaking, multiple dwellings are far better investments for rental purposes.

On the mortgage hook

Dear Bruce: I'm in my 70s, and I have my name on my daughter's home so that her income would be enough to get a mortgage. I would like to take it off now. How can I do this? Some of the other members in the family are proving to be a little jealous. -C.T., via e-mail

Dear C.T.: As long as the mortgage is in place, the likelihood is that you will have to keep your name on the mortgage. You can, of course, quit-claim your interest in the house to your daughter, but you will still have responsibility for the mortgage should she default.

Coverage on a limb

Dear Bruce: This past summer, a nasty storm came through, and a falling limb from a large tree damaged my front porch. I turned in a claim, and the insurance company paid for the damages. About a month later, I received a notice stating the company would no longer renew my insurance policy unless the tree was removed. It will cost $1,100 to bring it down. When I asked the company to help with the cost, they said no. Can they do this? -Upset, via e-mail

Dear Upset: I don't see any reason why not. They are covering you to the end of the policy, and they have determined there was a risk on your property that would dissuade them from continuing coverage. I can't think of any way they would share in the cost of removing the tree any more than they would if there was some kind of structural defect in order to continue insuring it. Your choice: Get rid of the tree or find a new carrier, which may not be so easy these days.

Pay off condo or invest?

Dear Bruce: I am 62 years old. I purchased a condo two years ago for $94,000, putting down $43,000. Now it would easily appraise for $110,000. I am paying extra on the principal each month, with my goal to pay it off in 10 years. My sons and a co-worker advised me to invest the extra money that I am putting in as extra principal. They feel it would provide a better return on investment, and I could still pay off the loan and have money left over from the interest on my investment. I am a low-risk investor, and I would feel more comfortable having this condo paid off before I retire. -Reader, Norcross, Ga.

Dear Reader: The linchpin here is your comfort level. Your sons and the co-worker are correct to suggest that you should invest this money elsewhere. The likelihood is that the investment would grow at a greater rate than the reduction of the mortgage by prepaying. But at your age, comfort level is certainly worth considering.

Bruce Williams is a national radio talk-show host and syndicated columnist based in Florida. He can be reached at bruce@brucewilliams.com.