Use this calculator to determine your payment or loan amount for different payment frequencies. You can make payments weekly, bi-weekly, semi-monthly, monthly, bi-monthly, quarterly, semi-annually or annually. You can then examine your principal balances by payment, total of all payments made, and total interest paid.

Annuities—a type of insurance product— can be an effective investment vehicle, especially in providing for your retirement. This Financial Guide will help you decide whether annuity investments are right for you and how to use them in retirement planning. It also discusses the tax treatment of annuities.

How Annuities Work

Annuities may help you meet some of your mid- and long-range goals, such as planning for your retirement and for a child's college education. This Financial Guide tells you how annuities work, discusses the various types of annuities, and helps you determine which annuity product (if any) suits your situation. It also discusses the tax aspects of annuities and explains how to shop for both an insurance company and an annuity, once you know which type you'll need.

While traditional life insurance guards against "dying too soon," an annuity, in essence, can be used as insurance against "living too long." In brief, if you buy an annuity (generally from an insurance company, which invests your funds), you will receive in return a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income" until your death. If you "die too soon" (that is, you don't outlive your life expectancy), you will get back from the insurer far less than you paid in. On the other hand, if you "live too long" (and do outlive your life expectancy), you may get back far more than the cost of your annuity (and the resultant earnings). By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.

The earnings that occur during the term of the annuity are tax-deferred. You are not taxed on them until they are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.

How Annuities Best Serve Investors

Tip: Assess the costs of an annuity relative to the alternatives. Separate purchase of life insurance and tax-deferred investments may be more cost effective.

The two primary reasons to use an annuity as an investment vehicle are:

1. You want to save money for a long-range goal, and/or
2. You want a guaranteed stream of income for a certain period of time.

Annuities lend themselves particularly well to funding retirement and, in certain cases, education costs.

One negative aspect of an annuity is that you cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10% premature-withdrawal penalty on money taken out of a tax-deferred annuity before age 59-1/2 and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers’ penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.

These penalties lead to a de facto restriction on the use of annuities primarily as an investment. It only makes sense to put your money into an annuity if you can leave it there for at least ten years and the withdrawals are scheduled to occur after age 59-1/2. These restrictions explain why annuities work well for either retirement needs or for cases of education funding where the depositor will be at least 59-1/2 when withdrawals begin.

Tip: The greater the investment return, the less punishing the 10% penalty on withdrawal under age 59-1/2 will appear. If your variable annuity investments have grown substantially, you may want to consider taking some of those profits (despite the penalty, which applies only to the taxable portion of the amount withdrawn).

Annuities can also be effective in funding education costs where the annuity is held in the child’s name under the provisions of the Uniform Gifts to Minors Act. The child would then pay tax (and 10% penalty) on the earnings when the time came for withdrawals.

Caution: A major drawback is that the child is free to use the money for any purpose, not just education costs.

The Various Types Of Annuities

The available annuity products vary in terms of (1) how money is paid into the annuity contract, (2) how money is withdrawn, and (3) how the funds are invested. Here is a rundown on some of the annuity products you can buy:

• Single-Premium Annuities: You can purchase a single-premium annuity, in which the investment is made all at once (perhaps using a lump sum from a retirement plan payout). The minimum investment is usually $5,000 or $10,000.
• Flexible-Premium Annuities: With the flexible-premium annuity, the annuity is funded with a series of payments. The first payment can be quite small.
• Immediate Annuities: The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.
• Deferred Annuities: With a deferred annuity, payouts begin many years after the annuity contract is issued. You can choose to take the scheduled payments either in a lump sum or as an annuity—i.e., as regular annuity payments over some guaranteed period. Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used to fund tax-deferred retirement plans and tax-sheltered annuities. They may be funded with a single or flexible premium.
• Fixed Annuities: With a fixed annuity contract, the insurance company puts your funds into conservative fixed income investments such as bonds. Your principal is guaranteed and the insurance company gives you an interest rate that is guaranteed for a certain minimum period—from a month to several years. This guaranteed interest rate is adjusted upwards or downwards at the end of the guarantee period. Thus, the fixed annuity contract is similar to a CD or a money market fund, depending on the length of the period during which interest is guaranteed. The fixed annuity is considered a low-risk investment vehicle. All fixed annuities also guarantee you a certain minimum rate of interest of 3 to 5% for the entirety of the contract. The fixed annuity is a good choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low. Fixed annuity investors benefit if interest rates fall, but not if they rise.
• Variable Annuities: The variable annuity, which is considered to carry with it higher risks than the fixed annuity—about the same risk level as a mutual fund investment— gives you the ability to choose how to allocate your money among several different managed funds. There are usually three types of funds: stocks, bonds, and cash-equivalents. Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings.

   

Tip: You can switch your allocations from time to time for a small fee or sometimes for free.

The variable annuity is a good annuity choice for investors with a moderate to high risk tolerance and a long-term investing time horizon.

Caution: Variable annuities have higher costs than similar investments that are not issued by an insurance company.

Caution: The taxable portion of variable annuity distributions is taxable at full ordinary rates, even if they are based on stock investments. They do not enjoy capital gains relief or the reduced taxation available after 2002 and before 2009 for dividends from stock investments (including mutual funds).

Tip: Today, insurers make available annuities that combine both fixed and variable features.

Tip: Before buying an annuity, contribute as much as possible to other tax-deferred options such as IRA’s and 401 (k) plans. The reason is that the fees for these plans is likely to be lower than those of an annuity and early-withdrawal fees on annuities tend to be steep.

Tip:IRA contributions are sometimes invested in flexible premium annuities—with IRA deduction, if otherwise available. You may prefer to use IRAs for non-annuity assets. Non-annuity assets gain the ability to grow tax-free when held in an IRA. The IRA regime adds no such benefit to annuity assets which grow tax-free in or outside IRAs.

Choosing A Payout Option

When it’s time to begin taking withdrawals from your deferred annuity, you have various choices. Most people choose a monthly annuity-type payment, although a lump sum withdrawal is possible.

Caution: Once you have chosen a payment option, you cannot change your mind.

The size of your payout (settlement option) depends on:

1. The size of the amount in your annuity contract
2. Whether there are minimum required payments
3. Your life expectancy (or other payout period)
4. Whether payments continue after your death

Here are summaries of the most common forms of payout:

Fixed Amount

This type gives you a fixed monthly amount—chosen by you—-that continues until your annuity is used up. The risk of using this option is that you may live longer than your money lasts. Thus, if the annuity is your only source of income, the fixed amount is not a good choice. If you die before your annuity is exhausted, your beneficiary gets the rest.

Fixed Period

This option pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you are seeking retirement income before some other benefits start, this may be a good option. If you die before the period is up, your beneficiary gets the remaining amount.

Lifetime or Straight Life

This form of payments continues until you die. There are no payments to survivors. The life annuity gives you the highest monthly benefit of the options listed here. The risk is that you will die early, thus leaving the insurance company with some of your funds. The life annuity is a good choice if (1) you do not need the annuity funds to provide for the needs of a beneficiary and (2) you want to maximize your monthly income.

Life With Period Certain

This form of payment gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period, the lower the monthly benefit.

Installment-Refund

This option pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary. Monthly payments are less than with a straight life annuity.

Joint And Survivor

In one joint and survivor option, monthly payments are made during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor. In the option typically used for retired employees (employment model), monthly payments are made to the retired employee, with the same or a lesser amount to the employee's surviving spouse or other beneficiary. The difference is that with the employment model , the spouse's (or other co-annuitant's) death before the employee won't affect what the survivor employee collects. The amount of the monthly payments depends on the annuitants' ages, and whether the survivor's payment is to be 100% of the joint amount or some lesser percentage.

How Payouts Are Taxed

The way your payouts are taxed differs for qualified and non-qualified annuities.

Qualified Annuity

A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (simplified employee pension), or some other retirement plan. The tax-qualified annuity, when used as a retirement savings vehicle, is entitled to all of the tax benefits—and penalties—that Congress saw fit to attach to such qualified plans.

The tax benefits are:

1. Any nondeductible or after-tax amount you put into the plan is not subject to income tax when withdrawn
2. The earnings on your investment are not taxed until withdrawal

If you withdraw money from a qualified plan annuity before the age of 59-1/2, you will have to pay a 10% penalty on the amount withdrawn in addition to paying the regular income tax. There are exceptions to the 10% penalty, including an exception for taking the annuity out in a series of equal periodic payments over the rest of your life.

Once you reach age 70-1/2, you will have to start taking withdrawals in certain minimum amounts specified by the tax law (with exceptions for Roth IRAs and for employees still working after age 70-1/2).

Non-Qualified Annuity

A non-qualified annuity is purchased with after-tax dollars. You still get the benefit of tax deferral on the earnings. However, you pay tax on the part of the withdrawals that represent earnings on your original investment.

If you make a withdrawal before the age of 59-1/2, you will pay the 10% penalty only on the portion of the withdrawal that represents earnings.

With a non-qualified annuity, you are not subject to the minimum distribution rules that apply to qualified plans after you reach age 70-1/2.

Tax on Your Beneficiaries or Heirs

If your annuity is to continue after your death, other taxes may apply to your beneficiary (the person you designate to take further payments) or your heirs (your estate or those who take through the estate if you didn't designate a beneficiary).

Income tax: Annuity payments collected by your beneficiaries or heirs are subject to tax on the same principles that would apply to payments collected by you.

Exception: There's no 10% penalty on withdrawal under age 59-1/2 regardless of the recipient's age, or your age at death.

Estate tax: The present value at your death of the remaining annuity payments is an asset of your estate, and subject to estate tax with other estate assets. Annuities passing to your surviving spouse or to charity would escape this tax.

Tip: Ask your sales representative for a recent survey by Variable Annuity Research & Data Service. Many annuity portfolios are tracked by this service.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

How To Shop For An Annuity

Although annuities are issued by insurance companies, they may be purchased through banks, insurance agents, or stockbrokers.

There is considerable variation in the amount of fees that you will pay for a given annuity as well in the quality of the product. Thus, it is important to compare costs and quality before buying an annuity.

First, Check Out The Insurer

Before checking out the product itself, it is important to make sure that the insurance company offering it is financially sound. Because annuity investments are not federally guaranteed, the soundness of the insurance company is the only assurance you can rely on. Consult services such as A.M. Best Company, Moody’s Investor Service, Standard & Poor’s Ratings, Duff & Phelps Credit Rating Company, and Fitch IBCA, The International Rating Agency to find out how the insurer is rated.

Next, Compare Contracts

The way you should go about comparing annuity contracts varies with the type of annuity.

• Immediate annuities: Compare the settlement options. For each $1,000 invested, how much of a monthly payout will you get? Be sure to consider the interest rate and any penalties and charges.
• Deferred annuities: Compare the rate, the length of guarantee period, and a five-year history of rates paid on the contract. It is important to consider all three of these factors and not to be swayed by high interest rates alone.
• Variable annuities: Check out the past performance of the funds involved.

Tip: Ask your sales representative for a recent survey by Variable Annuity Research & Data Service. Many annuity portfolios are tracked by this service.

If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.

Costs, Penalties, And Extras

Be sure to compare the following points when considering an annuity contract:

Surrender Penalties

Find out the surrender charges (that is, the amounts charged for early withdrawals). The typical charge is 7% for first-year withdrawals, 6% for the second year, and so on, with no charges after the seventh year. Charges that go beyond seven years, or that exceed the above amounts, should not be acceptable.

Tip: Be sure the surrender charge "clock" starts running with the date your contract begins, not with each new investment.

Fees And Costs

Be sure to ask about all other fees. With variable annuities, the fees must be disclosed in the prospectus. Fees lower your return, so it is important to know about them. Fees might include:

• Mortality fees of 1 to 1.35% of your account (protection for the insurer in case you live a long time)
• Maintenance fees of $20 to $30 per year
• Investment advisory fees of 0.3% to 1% of the assets in the annuity’s portfolios.

Extras

These provisions are not costs, but should be asked about before you invest in the contract.

Some annuity contracts offer "bail-out" provisions that allow you to cash in the annuity if interest rates fall below a stated amount without paying surrender charges.

There may also be a "persistency" bonus which rewards annuitants who keep their annuities for a certain minimum length of time.

In deciding whether to use annuities in your retirement planning (or for any other reason) and which types of annuities to use, professional guidance is advisable.

Risk To Retirees of Using An Immediate Annuity

At first glance, the immediate annuity would seem to make sense for retirees with lump-sum distributions from retirement plans. After all, an initial lump-sum premium can be converted into a series of monthly, quarterly, or yearly payments that represent a portion of principal plus interest and is guaranteed to last for life. The portion of the periodic payout that constitutes a return of principal is excluded from taxable income.

However, this strategy contains risks. For one thing, when you lock yourself into a lifetime of level payments, you fail to guard against inflation. Furthermore, you are gambling that you will live long enough to get your money back. Thus, if you buy a $150,000 annuity and die after collecting only $60,000, the insurer often gets to keep the rest. Unlike other investments, the balance doesn't go to your heirs. Finally, since the interest rate is fixed by the insurer when you buy it, you may be locking yourself into low rates.

You can hedge your bets by opting for a "period certain", or "term certain" which, in the event of your death, guarantees payment for some years to your beneficiaries. There are also "joint-and-survivor" options (which pay your spouse for the remainder of his or her life after you die) or a "refund" feature (in which some or all of the remaining principal is resumed to your beneficiaries).

Some plans offer quasi-inflation adjusted payments. One company offers a guaranteed increase in payments of $10 at three-year intervals for the first 15 years. Payments then get an annual cost-of-living adjustment with a 3% maximum. However, for these enhancements to apply, you will have to settle for much lower monthly payments than the simple version.

Recently, a few companies have introduced immediate annuities that offer potentially higher returns in return for some market risk. These "variable immediate annuities" convert an initial premium into a lifetime income; however, they tie the monthly payments to the returns on a basket of mutual funds.

Older seniors—75 years of age and up— may have fewer worries about inflation or liquidity. Nevertheless, they should question whether they really need such annuities at all.

If you want a comfortable retirement income, consider a balanced portfolio of mutual funds. If you want to guarantee that you will not outlive your money, you can plan your withdrawals over a longer time horizon.

Source: CPA Site Solutions

Debt should be incurred with caution. Yet there are ways to take advantage of your available credit to enjoy a purchase, make an investment, or take care of an emergency. Here is a guide to finding out which form of borrowing will best suit your needs and some pointers on finding the lowest-cost loan available.

Topics

• Types Of Loans
• How To Shop For A Loan
• Comparing Loans
• Home Equity Loans
• Recommended Books

Types Of Loans

Let’s take a look at the various ways you can borrow money—and the negative and positive aspects of each.

Home Equity Loans

By using the equity in your home, you may qualify for a sizable amount of credit, available for use when and how you please at an interest rate that is relatively low. Furthermore, under the tax law—depending on your specific situation—you may be allowed to deduct the interest because the debt is secured by your home.

Home Equity Lines Of Credit

A home equity line of credit is a form of revolving credit in which your home serves as collateral. Because the home is likely to be a consumer's largest asset, many homeowners use their credit lines only for major items such as education, home improvements, or medical bills—not for day-to-day expenses. With a home equity line, you will be approved for a specific amount of credit— your credit limit—that is the maximum amount you can borrow at any one time while you have the plan.

Many lenders set the credit limit on a home equity line by taking a percentage (say, 75%) of the appraised value of the home and subtracting the balance owed on the existing mortgage.

Example: A home with a $60,000 mortgage debt is appraised at $200,000. The bank sets a 75% credit limit. Thus, the potential credit line is $90,000 (75% of $200,000 = $150,000 - $60,000).

In determining your actual credit line, the lender will also consider your ability to repay by looking at your income, debts, other financial obligations, and your credit history.

Home equity plans often set a fixed time during which you can borrow money, such as 10 years. When this period is up, the loan may allow you to renew the credit line. But, in a loan that does not allow renewals, you will not be able to borrow additional money once the time has expired. Some plans may call for payment in full of any outstanding balance, while others may permit you to repay over a fixed time.

Once approved for the home equity plan, you will usually be able to borrow up to your credit limit whenever you want. Typically, you will be able to draw on your line by using special checks. Under some plans, borrowers can use a credit card or other means to borrow money and make purchases using the line. However, there may be limitations on how you use the line. Some plans may require you to borrow a minimum amount each time you draw on the line—for example, $300—and to keep a minimum amount outstanding.

Some lenders also may require that you take an initial advance when you first set up the line.

Traditional Second Mortgage Loans

If you are thinking about a home equity line of credit you might also want to consider a more traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

Tip: Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

Caution: Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line—the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

Automobile Loans

Automobile loans are among the most common types of loans today. Your automobile serves as the security for the loan. These loans are available not only through banks but also through automobile dealers. However, the dealer itself does not provide the financing; it simply routes the loan to an affiliated finance company, such as the General Motors Acceptance Corporation (GMAC).

Investment Loans

Borrowing against your securities can be a low-cost way to borrow money. No deduction is allowed for the interest unless the loan is used for investment or business purposes.

Caution: If your margin debt exceeds 50% of the value of your securities, you will be subject to a margin call, which means that you will have to come up with cash or sell securities. If the market is falling at the time, a margin call can cause a financial disaster. Therefore, we recommend against use of margin debt, unless the amount is kept way below 50%. We think 25% is a safe percentage.

CD And Passbook Loans

Because the rate of interest you are earning on the CD or savings account is probably less than the interest that would be charged on the loan, it is usually a better idea to withdraw the money in the account (waiting until the term of the CD is up, to avoid penalties), than to borrow against it.

Loans Against 401(K) Plans And Life Insurance

One advantage of borrowing from a 401(k) plan or profit-sharing plan, assuming loans are permitted, is that the interest you pay goes back into your own pocket—right into your 401(k) or profit-sharing account. The amount of the loan is limited.

Loans against life insurance policies used to be available at fairly low rates. If you can get a rate of 5 or 6% on a loan against the cash value of your life insurance policy, it is generally a good deal. If the rate is any higher than this, such a loan is generally not a good idea.

Credit Union Loans

Credit union loans may be available at lower rates than those of banks.

Banks And Savings And Loans

If you obtain an unsecured loan at a bank, the rate will be higher because there is no collateral. For this reason, unsecured bank loans are generally not attractive.

Credit Card Advances

These are almost always a bad idea, despite their convenience, because of the high rate you will pay.

How To Shop For A Loan

If you are thinking of borrowing, your first step is to figure out how much it will cost you and whether you can afford it. Then shop for the credit terms that best meet your borrowing needs without posing undue financial risk. Look carefully at the credit agreement and examine the terms and conditions of the various possibilities, including the annual percentage rate (APR) and the costs you will pay to establish the plan.

The Truth in Lending Act requires lenders to disclose the important terms and costs of credit, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have received this information. Use these disclosures to compare the costs of loans. You usually get these disclosures when you receive an application form and you will get additional disclosures before the loan is made. If any term has changed before the loan is made (other than a variable-rate feature), the lender must usually return all fees if you decide not enter into the loan because of the changed term.

Interest Rate Charges And Loan Features

Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you, in writing and before you sign any agreement, the finance charge and the annual percentage rate.

• The finance charge is the total dollar amount you pay to use credit. It includes interest costs, service charges and some credit-related insurance premiums. For example, a $10,000 loan may have a 10% interest rate and a service charge of $100; thus, the finance charge would total $1,100.
• The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

Example: You borrow $10,000 for one year at 10%. If you can keep the entire $10,000 for the whole year, and then pay back 11,000 at the end of the year, the APR is 10%. On the other hand, if you repay the $10,000, and the interest (a total of $11,000) in 12 equal monthly installments, you don't really get to use $10,000 for the whole year. In fact, you get to use less and less of that $10,000 each month. In this case, the $1,000 charge for credit amounts to an APR of 18%.

All creditors—banks, stores, car dealers, credit card companies, finance companies—must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure so that you can compare credit costs. The law says these two pieces of information must be shown to you before you sign a credit contract or use a credit card.

Interest rates may be either fixed or variable. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). Lenders then add a margin, i.e., a number of percentage points, to the index value to arrive at the interest rate you will pay. This interest rate will change, mirroring fluctuations in the index.

Tip: Because the cost of borrowing is tied directly to the index rate, ask what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate — a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans may have a ceiling (or cap) on how high your interest rate can climb over the life of the loan. Some variable-rate plans limit how much your payment may increase and how low your interest rate may fall if interest rates drop. Some lenders may permit you to convert a variable rate to a fixed interest rate during the life of the plan or to convert all or a portion of your line to a fixed-term installment loan.

With a variable rate, your monthly payments may change. Assume, for example, that you borrow $10,000 under a loan that calls for interest-only payments. At a 10% interest rate, your initial payments would be $83 monthly. If the rate should rise over time to 15%, your payments will increase to $125 per month. Even with payments that cover interest plus some portion of the principal, there could be a similar increase in your monthly payment, unless the agreement calls for keeping payments level throughout the plan.

Agreements generally will permit the lender to freeze or reduce your credit line under certain circumstances. For example, some variable-rate plans may not allow you to get additional funds during any period the interest rate reaches the cap.

Repaying The Loan

Consider how you will pay back any money you might borrow. Some plans set minimum payments that cover a portion of the principal of the amount you borrow plus accrued interest. But, unlike the typical installment loan, the portion that goes toward principal may not be enough to repay the debt by the end of the term. Other plans may allow payments of interest alone during the life of the plan, which means that you pay nothing toward the principal. Thus, if you borrow $10,000, you will owe that entire sum when the loan ends.

Regardless of the minimum payment required, you can usually pay more than the minimum. Many lenders may give you a choice of payment options.

Whatever your payment arrangements during the life of the loan—whether you pay some, a little, or none of the principal amount of the loan—you may have to pay the entire balance owed when the loan ends, all at once. You must be prepared to make this "balloon" payment by refinancing it with the lender, by obtaining a loan from another lender, or by some other means. If you are unable to make the balloon payment, you could lose any security given for the loan (e.g., your home or car).

Comparing Loans

Even when you understand the terms a creditor is offering, it is easy to underestimate the difference in dollars that different terms can make. Suppose you are going to borrow $6,000. Compare the three credit arrangements below:

Creditor	APR	Length of Loan	Monthly Payment	Total Finance Charges	Total of Payments
Creditor A	14%	3 years	$205.07	$1,382.52	$7,382.52
Creditor B	14%	4 years	$163.96	$1,870.08	$7,870.08
Creditor C	15%	4 years	$166.98	$2,015	$8,015.04

How do these choices stack up? The answer depends partly on what you need.

• The lowest cost loan (total payments) is available from Lender A.
• If you were looking for the lowest monthly payments, that would be available from Lender B. This is because you are paying the loan off over a longer period of time. However, you would have to pay more in total costs. The loan from Lender B—also at a 14% APR but for four years—will add about $488 to your finance charge.
• If that four-year loan were available only from Lender C, the APR of 15% would add another $145 or so to your finance charges as compared with Lender B.

Other terms, such as the size of the down payment, will also make a difference. Be sure to look at all the terms before you make your choice.

Home Equity Loans

Before signing for a home equity line of credit or other type of home equity loan, weigh carefully the costs of a home equity debt against the benefits. Remember, failure to repay the line could mean the loss of your home.

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home, such as:

• A fee for a property appraisal, which estimates the value of your home;
• An application fee, which may not be refundable if you are turned down for credit;
• Up-front charges, such as one or more points (one point equals one percent of the credit limit);
• Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes; and
• Yearly membership or maintenance fees.

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed. On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit. The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

Source: CPA Site Solutions

Don’t Just Look At Numbers; What’s Your Gut Telling You?

It’s not hard to find advice on how to manage your money these days. You can find plenty of it on the Internet, in books, magazines and newspapers, from well-meaning friends and relatives, and of course, from professional advisors.

But while finding financial guidance is easy, judging the worth of it can be a much tougher task. Even hiring a professional adviser is no guarantee you’ll get great advice. If you’re paying someone for a personalized plan, though, you especially want to make sure you’re getting your money’s worth.

The true test is whether you reach your goals. But if your goal is decades away – retirement, for example – you don’t want to wait until age 65 to see if you made the right moves.

I would encourage people to look at their overall situation no less than annually and assess the quality of the service they’re getting.

So what things should you look at? Ask yourself these questions when gauging money advice:

What are the numbers? The most obvious way to judge investment advice is by performance. But make sure your expectations are realistic.

If you have a diversified portfolio, you’re going to outperform the worst asset class but under perform the best. With that in mind, don’t look at just your pure rate of return. You don’t have to be in the year’s highest flying mutual funds and stocks to succeed.

Instead, you and your advisor should quantify your goals when creating your financial plan.

That plan should include periodic, realistic mileposts to check your progress against. If your net worth isn’t growing as fast as you’d forecast, examine why. Maybe it was just a down year in the market. Or maybe you’ve been too cautions with your investments and need to make a change.

What does your gut say? Can you stomach the investment risk they’re taking?

The real key is to remain invested.

Some discomfort is normal. You’re not going to gain anything without taking risks. But if you’re so nervous about the risk you’re taking that you cannot stay invested, you need to talk to your advisor. If you’re always buying at the top and selling at the bottom, you won’t build wealth.

You also should pay attention if your gut feeling is telling you that your advisor isn’t being honest with you.

If it doesn’t feel right, it probably isn’t. If your advisor doesn’t listen to you, doesn’t return your phone calls, does some kind of trading in your account that you didn’t know about, you need to raise your hand and say something.

Have you been following the advice?

If you haven’t put your plan into practice, what’s stopping you? If it is because the suggestions are too complex, and you don’t understand them or they make you uncomfortable, talk to your advisor.

Why pay for counsel you’re not going to use? If your planner won’t listen, you may need to hire someone else.

Is the advice clear to you?

I really believe that the way an advisor speaks to a client is very important. Sometimes people who aren’t confident about something use lingo to make themselves appear to be an expert.

Also, it’s crucial for you to understand the money moves you are making – and why you’re making them.

We need to be responsible for our financial futures. If you abdicate responsibility and say ‘So-and-so will take care of it’ you may find out when it is too late that so-and-so wasn’t taking care of it.

Is your advisor a good listener?

Responsiveness is a key thing. Many people have questions. Are you getting good answers to those questions?

I would be concerned if an accountant said ‘don’t worry about those details. Just trust me.’ People are entitled to understand what they are doing and why.

You should feel comfortable enough with your advisor to ask anything.

Most of us don’t want to embarrass ourselves or admit we don’t understand something, but it’s very important to feel OK saying ‘I don’t have a clue what you’re talking about.’

Source: CPA Site Solutions

Like dandelions in a spring lawn, credit card offers pop up everywhere--stuffing your mailbox, flashing on the Internet, even falling from the magazines in your doctor's waiting room. And they all sound so attractive. "0% APR until next year!" "No fee if you transfer a balance now!" "Low fixed rate!"

You're thinking of applying for a card, but how do you decide which offer is best for you?

Source: Federal Reserve Board

How do I determine my long-term financial goals?

Together with your spouse or other family members, decide – realistically – what you want to achieve financially. These will vary from family to family. Goals might include: early retirement, travel, a vacation home, securing your family’s financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

Is there any validity to financial planning "rules of thumb"—such as "saving 10% of your gross income" or "needing 80% of your pre-retirement income to retire comfortably"?

The following rules of thumb may work for some people. But they do not make financial sense for everyone. What’s important is to be able to know whether a rule suits your situation. Here are some of those rules, and some considerations that should not be overlooked.

"Your life insurance should equal five times your yearly salary." This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you in particular need to buy. The amount you need will depend on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and other factors.

Save 10% of your salary per year. You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life—in their 40s—need to save at least 15 or 20% per year.

Contribute as much as you can to retirement plans. This makes sense for most people, but if you’ve accumulated a large amount of money in a retirement plan—close to a million dollars—you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.

You need 80% of your pre-retirement income to retire comfortably. Although people may need 80% of your salary during the first few years of retirement, later on they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and on other factors.

Subtract your age from 100, and invest that percentage in stocks. This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating your investments among various types of investments depends on your investment goals and needs, and your willingness to risk your capital. In this case, rules of thumb do not serve the investor at all.

Maintain an emergency fund of six months’ worth of expenses. Depending on your family’s situation, three months’ worth of expenses might be enough of an emergency fund; or six months’ worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short term loan, and how much money you have in savings and investments, among other things.

Tip: Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and calculate what you’ll need to do to fulfill them.

What do women in particular need to keep in mind with regard to financial planning?

A recent survey done by a Midwestern bank of 208 women revealed the following about the survey participants, who were all age 30 or older, and all or whom had incomes of at least $40,000.

• The median amount of monthly savings the women in the survey said was adequate was $475 – much less than what is needed to live out a comfortable retirement.
• 79% of the women said their investment style was moderate or conservative, as opposed to aggressive—yet some aggressiveness in investing is necessary to stay ahead of inflation.
• 31% of the women do not have a will, yet 49% believe their finances will be in order if they die unexpectedly.
• 26% said they have a poor or only fair understanding of their parents' wishes—making them ill-prepared to deal with the death of a parent.

What special problems do unmarried couples have to be concerned with in financial and estate planning?

Because the law grants certain benefits and favors to married couples and not to unmarried couples, the latter must take certain steps in precautions in taking care of their financial planning needs.

Here is an overview of the special considerations and problems that apply to unmarried couples, and what can be done about them. It is a good idea to seek out the aid of legal and financial professionals who are familiar with the issues faced by family units in which there is no legal marriage.

They do not automatically inherit each other’s property. Married couples who do not have a will have the state intestacy laws to back them up: unmarried couples must have a will to see that their wishes are met.

They do not have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, such as a living will, you may not have the right to do so.

They do not have the right to manage each other’s finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple. Unmarried couples can also mitigate this problem by owning some property jointly.

© CPA Site Solutions

It may not be easy easy, but single parents can keep their families economically stable.

How do I determine my long-term financial goals?

Together with your spouse or other family members, decide – realistically – what you want to achieve financially. These will vary from family to family. Goals might include: early retirement, travel, a vacation home, securing your family’s financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.

Is there any validity to financial planning "rules of thumb"—such as "saving 10% of your gross income" or "needing 80% of your pre-retirement income to retire comfortably"?

The following rules of thumb may work for some people. But they do not make financial sense for everyone. What’s important is to be able to know whether a rule suits your situation. Here are some of those rules, and some considerations that should not be overlooked.

"Your life insurance should equal five times your yearly salary." This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you in particular need to buy. The amount you need will depend on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and other factors.

Save 10% of your salary per year. You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life—in their 40s—need to save at least 15 or 20% per year.

Contribute as much as you can to retirement plans. This makes sense for most people, but if you’ve accumulated a large amount of money in a retirement plan—close to a million dollars—you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.

You need 80% of your pre-retirement income to retire comfortably. Although people may need 80% of your salary during the first few years of retirement, later on they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and on other factors.

Subtract your age from 100, and invest that percentage in stocks. This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating your investments among various types of investments depends on your investment goals and needs, and your willingness to risk your capital. In this case, rules of thumb do not serve the investor at all.

Maintain an emergency fund of six months’ worth of expenses. Depending on your family’s situation, three months’ worth of expenses might be enough of an emergency fund; or six months’ worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short term loan, and how much money you have in savings and investments, among other things.

Tip: Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and calculate what you’ll need to do to fulfill them.

What do women in particular need to keep in mind with regard to financial planning?

A recent survey done by a Midwestern bank of 208 women revealed the following about the survey participants, who were all age 30 or older, and all or whom had incomes of at least $40,000.

• The median amount of monthly savings the women in the survey said was adequate was $475 – much less than what is needed to live out a comfortable retirement.
• 79% of the women said their investment style was moderate or conservative, as opposed to aggressive—yet some aggressiveness in investing is necessary to stay ahead of inflation.
• 31% of the women do not have a will, yet 49% believe their finances will be in order if they die unexpectedly.
• 26% said they have a poor or only fair understanding of their parents' wishes—making them ill-prepared to deal with the death of a parent.

What special problems do unmarried couples have to be concerned with in financial and estate planning?

Because the law grants certain benefits and favors to married couples and not to unmarried couples, the latter must take certain steps in precautions in taking care of their financial planning needs.

Here is an overview of the special considerations and problems that apply to unmarried couples, and what can be done about them. It is a good idea to seek out the aid of legal and financial professionals who are familiar with the issues faced by family units in which there is no legal marriage.

They do not automatically inherit each other’s property. Married couples who do not have a will have the state intestacy laws to back them up: unmarried couples must have a will to see that their wishes are met.

They do not have the right to speak for each other in a medical crisis. If your life partner loses consciousness or capacity, someone will have to make the decision whether to go ahead with a medical procedure. That person should be you. But unless you have taken care of some legal paperwork, such as a living will, you may not have the right to do so.

They do not have the right to manage each other’s finances in a crisis. A husband and wife who have jointly owned assets will generally be affected less by this problem than an unmarried couple. Unmarried couples can also mitigate this problem by owning some property jointly.

© CPA Site Solutions

Managing your monthly budget can be difficult and frustrating. One of the most important aspects of controlling your budget is to determine where your money is going. This calculator helps you do just that.

By entering your income and monthly expenditures, you can see how much you have left to save and where your money is being spent. In addition, you can click the "View Report" button to compare your budget breakdown to our targets, which can help identify areas for improvement.

CPA Site Solutions

What's good about investing in IRAs?

There are Roth IRAs and Traditional IRAs, both of which are discussed in the Financial Guide listed below. All IRAs defer taxation of investment income until funds are withdrawn. Contributions to Traditional IRAs in many cases are deductible; withdrawals from Traditional IRAs are taxable income, except for withdrawal of previously non-deductible contributions.

Can anyone have a traditional IRA?

If you have income from wages or self-employment income, you can contribute up to $4,000 in 2005-7, higher in later years. Thus, they are available even to children who meet these conditions.

Can my homemaker spouse have an IRA?

Yes. Contributions of $4,000 for each spouse are allowed if the couple’s wages or self-employment earnings are $8,000 or more. This rises to higher amounts after 2007.

What makes Roth IRAs so special?

Roth IRAs offer the following advantages:

• Withdrawals—if they qualify—are completely exempt from income tax, unlike all other retirement plans.
• Many can quickly build up their Roth IRA accounts by converting traditional IRAs into Roth IRAs—at a tax cost.
• Since you need not withdraw from your Roth IRA at any age, more can be passed on to heirs than would be allowed under other plans.

Can anyone have a Roth IRA?

Not everyone can have a Roth IRA. The following conditions apply:

• You can’t contribute to a Roth IRA for a year with income above $110,000 if single or $160,000 on a joint return.
• You can’t convert a traditional to a Roth IRA with income above $100,000 (single or joint return).
• You must have earnings from personal services—$4,000 or more to make the (maximum) contribution - though an additional contribution of $1,000 is allowed persons age 50 and over. The $4,000 amount for earnings and contributions rises higher after 2007.

Can I set up a Roth IRA for my spouse?

Yes, subject to the income conditions above. This allows contributions of $4,000 each if the couple’s earnings are at least $8,000 after 2004; higher amounts after 2007.

Can I set up a Roth IRA for my child?

Yes, for a child with personal service earnings, and subject to the other income conditions.

What's the downside to Roth IRAs?

The following is a brief list of negative issues regarding Roth IRAs:

• There’s never a deduction for Roth IRA contributions.
• To build a sizable Roth IRA fund, you must convert a traditional IRA (or, after 2007, funds form an employer plan). Conversions are taxable.
• In converting to a Roth IRA, you risk an excess contribution penalty and an early withdrawal penalty, if income exceeds $100,000.

What can I do if I converted to a Roth IRA and my income exceeds $100,000?

You can "re-characterize" your Roth IRA to a Traditional IRA (with suitable paperwork). This eliminates the Roth IRA and the tax. The deadline is the tax return due date including extensions.

What if my Roth IRA assets fall in value after conversion?

You can re-characterize as in the preceding answer, so you don’t pay tax on asset values you no longer have.

How are my heirs taxed on inherited Roth IRA wealth?

Your heirs are taxed as follows:

• No income tax whatever, if the funds have been in the Roth IRA at least 5 years.
• The heir can spread the withdrawal over his or her life, continuing the tax shelter for amounts not withdrawn.
• Estate tax treatment is the same as for traditional IRAs.

When shall I use a rollover to my IRA?

That depends on your particular needs and circumstances. Here are some reasons you might want to roll over distributions to your IRA:

1. You want to, or have to, take a distribution from your employer’s plan and want these funds to continue to grow tax-free in your own IRA.
2. As a self-employed, you are terminating your Keogh plan or retiring from business and want to continue the tax shelter for these distributions.
3. You are the beneficiary of a deceased person's retirement plan and want to continue the tax shelter for these distributions in your own IRA.

Is there a downside to an IRA rollover?

Here are some of the disadvantages of an IRA rollover:

1. Rollovers from company or Keogh plans may take away your spouse’s right to share in plan assets.
2. IRAs can’t claim the limited tax relief allowed on lump-sum distributions.

Tip: To avoid tax hassles, rollovers should be done between the trustees of the plans involved, and not as a do-it-yourself.

© CPA Site Solutions

When seeking legal aid, as in purchasing any product or service, it’s important to be a smart consumer: to be well informed and to know exactly what you are getting for your money. This Financial Guide discusses how to find an attorney who will provide cost-effective help with your legal problems.

Topics

• Step 1: Decide Whether You Need A Lawyer
• Step 2: Get Some Names
• Step 3: Start Asking Questions
• Step 4: Interview The Candidates
• Step 5: Make Your Decision
• Step 6: Clarify Fee Arrangements and Similar Issues
• Step 7: Define Your Relationship And Stay Involved
• Elder Law
• Recommended Books
• Legal Hot-Lines
• Other Free Or Low-Cost Services

This Financial Guide gives you a roadmap to the process of finding a good lawyer and making sure that the legal services you are getting are cost-effective. Before hiring an attorney, take the following steps.

Step 1: Decide Whether You Need A Lawyer

You hire a lawyer to help you resolve disputes, engage in legal transactions, or assert your legal rights. For certain legally complex or time-consuming disputes or problems, there is no doubt that a lawyer is necessary. For example, if you want a will prepared, or a more complex business deal handled, you will need a lawyer. Or if a court case is involved (other than a simple, routine matter), you’ll almost always need a lawyer. There may, however, be ways to resolve a problem or dispute without the specialized assistance of a lawyer.

In deciding whether to hire a lawyer, consider the following:

• Does the matter involve a complex legal issue, or is it likely to go to court? These two factors indicate you need a lawyer.
• Is a form or self-help book available that you can use instead of hiring a lawyer? You may be able to solve certain problems with no legal help or with only minimal assistance.
• Is a large amount of money, property, or time involved? These factors indicate you need a lawyer.
• Are there any non-lawyer legal resources available to assist you (such as mediation, arbitration, or small claims court)?

Mediation or Arbitration

Dispute resolution centers have been established in almost all states. The American Bar Association's Section on Dispute Resolution estimates that there are currently more than 450 community dispute resolution centers and more than 1,200 court-related dispute resolution programs throughout the country. While the centers vary, most specialize in helping to resolve problems in the areas of consumer complaints, landlord/tenant disputes, and disagreements between neighbors or family members.

The names, services, and fees (if any) of the centers vary from place to place, but they generally use two different processes to resolve problems: mediation and arbitration. Mediation involves a neutral person who assists the two sides to discuss their differences and possibly reach an agreement. In arbitration, the neutral third party conducts a more formal process and makes a decision (usually written) after listening to both sides.

If both parties can agree to it, using a dispute resolution center (sometimes called a community justice center) or a private mediation center can be a low-cost alternative to bringing a suit in court or hiring an attorney to represent you in a negotiation. In some areas, the court itself may refer certain types of cases to a mediation program.

Small Claims Court

Small claims court may be appropriate if you have a monetary claim for damages within the limits set by your state (usually $1,000 to $5,000). These courts are more informal and involve less paperwork than regular courts. The filing costs are low and the system is faster than the regular court system. If you file in small claims court, be prepared to act as your own attorney, gather the needed evidence, research the law, and present your story in court.

Are you willing to collect information and do research on your own? Is there a time limit on when you must file suit? Ask the small claims court clerk or look it up in your local law library. You must file your case before this time limit (usually within a year). Are you able to prove that the person against whom you are making the claim owes you money? You must be able to prove legal liability and that you have suffered a financial loss as the result of someone else's action.

In deciding whether to use small claims court, check the many "how-to" books in the library for general information. Check with the clerk in the small claims court, local consumer agency, or legal aid office for more information in your area.

Step 2: Get Some Names

Once you have decided you need a lawyer, it’s time to begin shopping around. The first step is to compile a list of names. The recommendation of someone whose judgment you trust is an excellent place to start your search. You may want to begin by asking relatives, friends, clergy, social workers, or your doctor for recommendations. Often those persons can refer you to someone who has provided similar legal services for them. You need to know more about the lawyer than simply that he or she is a good attorney. Ask those making the recommendation for specific information about the type of legal help the lawyer provided them and how their case was handled.

Bar Association Referral Lists

Many state and local bar associations maintain lawyer referral lists by specialty. A referral service will provide you with the name of an attorney who specializes in the area you need. Keep in mind, however, that a referral is not a recommendation and does not guarantee a level of experience. Bar associations may charge participating lawyers and law firms a fee to be included on the referral list.

Caution: Many bar associations have committees that conduct training or public service work in specialized areas. An attorney serving on one of these committees could have the expertise you are looking for.

Tip: If you use a referral service, ask how attorneys are chosen to be listed with that particular service. Many services make referrals to all lawyers who are members (regardless of type and level of experience) of a particular organization.

Other Resources

Two of the larger lawyer directories are probably available at your local library. The Martindale Hubbell Law Directory lists 600,000 American and Canadian lawyers alphabetically by state and by categories. Each entry has a biography, with information on each lawyer's education, specialty, law firm, and the date of admittance to the bar. It also includes a "rating" based on information supplied by fellow lawyers. The Who's Who in American Law directory lists about 24,000 lawyers and includes biographical notes. This directory is somewhat difficult to use because the lawyers are listed alphabetically rather than by state or specific area of expertise.

Many communities also have other lawyer referral services to assist people in finding a lawyer. Often the services are for specific groups such as persons with disabilities, older persons, or victims of domestic violence. Groups that may be good sources for a local referral include the Alzheimer's Association and other support groups for specific diseases, such as Children of Aging Parents, the Older Women's League, the state civil liberties union, a local social services agency, or the local agency on aging.

Other referral services may be financed by a few lawyers who receive all the referrals. Some services may screen the lawyers who wish to have referrals in a particular area.

Lawyers are permitted to advertise within specific guidelines. You will be able to gather some useful information from ads. However, as with any advertisement, take everything with a grain of salt.

Many attorneys specializing in areas of the law in which there may be substantial fees--such as personal injury or medical malpractice--advertise free consultations. Advertisements may list a set fee for a particular type of case. Many attorneys who do not advertise may also provide free consultations or offer set fees for a certain legal problem.

Caution: Keep in mind that set fees are usually for routine, uncomplicated cases. Your case may not be regarded as simple.

In addition, the court and your banker may be good referral sources. Finally, the yellow pages of the telephone book often lists lawyers according to their specialties.

Step 3: Start Asking Questions

To start the process of hiring a lawyer, call several lawyers to whom you have been referred or about whom you have heard. Ask them the preliminary questions listed below before committing yourself to a consultation. The answers you get will help you choose the two or three lawyers you wish to interview.

Since this is only a preliminary telephone conversation, ask questions that can be answered briefly. Here are some questions to ask:

• Will you provide a free consultation for the initial interview?
• How long have you been in practice?
• What percentage of your cases are similar to my type of legal problem? (A lawyer with experience in handling cases like yours will be more efficient, which may save you money.)
• Can you provide me with any references, such as trust officers in banks, other attorneys, or clients?
• Do you represent any clients or special-interest groups that might cause a conflict of interest?
• What type of fee arrangement do you require? Are the fees negotiable?
• What type of information should I bring with me to the initial consultation?

Follow up your phone calls by scheduling interviews with at least two of the attorneys. Don't feel embarrassed about selecting only the best candidates or canceling appointments with some of the attorneys after you complete all of your exploratory calls.

Step 4: Interview The Candidates

A personal interview is absolutely necessary. Whether you want a lawyer for a single transaction or over a period of years, you will be sharing details of your life and relying upon this person's expertise and advice. Since the lawyer will act on your behalf, it is critical that you feel comfortable with your attorney and that your will function in an atmosphere of mutual respect. A personal interview is the best way to make this judgment.

Come prepared with a brief summary of your immediate case (including dates and facts) as well as a list of general questions for the attorney.

The purpose of the interview is twofold: (1) to decide if the attorney has the necessary experience and is available to take your case; and, (2) to decide if you are comfortable with the fee arrangement and, most importantly, comfortable working with the attorney.

Since this an initial consultation, it may not be a lengthy one. Be concise and approach the interview in a businesslike manner. Be prepared to take notes, to listen carefully to the attorney, and to make observations about the office and how it is run.

Bring to the interview:

• A brief, written summary of your case
• A list of questions for the attorney
• Cards or a small notebook
• A pen/pencil for notes
• Copies of any notices you have received

In addition to any unanswered questions from the telephone calls, you may want to consider asking the following questions:

• How long has this attorney worked on cases like yours?
• Based on your brief description of the problem, ask about the range of outcomes you could expect (rough estimate of length of time, cost for legal services, and size of the award if any). Ask if the case is likely to be settled or will it go to trial.

  Caution: Many factors affect how a case is decided. If the attorney gives you an ironclad promise that you will win, a red flag should go up.

• Ask for an opinion of the strengths and weaknesses of a case like yours. This should be based on your lawyer's experience with similar cases.
• Ask who will be working on your case. Will this attorney be doing all of the research, case preparation, negotiation, and court work, or will associates or non-attorney advocates be handling parts of it? What are the experience and expertise of these other advocates? Will other experts, including other attorneys, be consulted? If so, who will they be? If others will work on the case, what will the fee arrangement be? (These questions are particularly important to ask of attorneys practicing in large law firms where work is often delegated to associates and/or paralegals.)
• Ask about fees and expenses. These are not the same. An attorney's fee is the payment you make for the attorney's time. Expenses refer to a variety of other costs including witness fees, court filing fees, copying, messenger service, etc. (See the question on fees below.)
• Ask if the attorney will work out a written fee agreement with you. (The specifics of the arrangement should be in writing.)
• Ask how often the attorney will bill you; is a retainer required?
• Decide what type of involvement in the case you want. Ask if the attorney is comfortable with that level of involvement. (See the questions below on client involvement and cutting costs.)
• Find out what hours the attorney will be available for meetings. This may be particularly important if you must leave work to meet with the attorney. Will you meet in the evening or on weekends? Will the attorney visit your home, if needed?

Observe how the attorney responds to your questions. Does he or she seem organized (take notes, etc.)? Respond openly and directly to your questions? Provide you with written background material on the topics of interest to you? Provide clear explanations?

Observe the physical surroundings and office staff. Is the staff friendly? Are they responsive? Do people identify themselves on the telephone so you know to whom you are speaking? Does anyone explain the roles of people with whom you may be dealing? Is the pace frenetic, lackadaisical, or busy in an organized fashion?

Observe your attorney during the preliminary interview to see whether he or she fits the bill:

• Neatness counts. Does the attorney appear neat and clean?
• Timeliness. You should not be kept waiting for your appointment.
• Focus. Does the attorney leave the room frequently during your appointment? Does he or she take phone calls? You should be getting his complete attention. Does the attorney listen attentively, or does he or she appear bored or distracted, or glance at his or her watch?
• Openness about fees. An attorney who does not discuss fee arrangements up front may be more likely to surprise you with large, unexpected bills. The fee should be discussed at the first interview.

Step 5: Make Your Decision

After the interviews, review your notes. Look at the strengths and weaknesses of each attorney you interviewed. Decide what is most important to you. Factors to consider in choosing an attorney include:

• Cost. Cost is rarely the only deciding factor unless it is a simple case which will take little time and that is the only contact you plan to have with the attorney. However, it is critical that you feel comfortable and knowledgeable about the financial arrangement. Disputes over fees are one of the most common conflicts between clients and attorneys.
• Experience. Does the attorney have the necessary experience for the case you have? For a simple will, a relatively new attorney may be a cost-effective choice. However, for a complex estate plan, you need someone with more experience. The higher fee is likely to be balanced by not having to pay for the attorney to learn on the job.
• Availability. Can the attorney accept the case immediately? Will the attorney be able to devote the time you want to the case? This is particularly important if you prefer a lot of interaction with your attorney.
• Your Comfort Level/Mutual Respect. It is important not to choose an attorney simply because you are impressed by the firm's reputation. You should be satisfied with the expertise of the people actually working on your case. Will you trust them enough to tell them private matters relevant to the case that you may not have shared with others? Do you believe the attorney treats your ideas and opinions with respect?

Step 6: Clarify Fee Arrangements and Similar Issues

Fees are one of the least discussed parts of any legal case, yet are highly important to both client and lawyer. Frequently fees are not discussed early enough, candidly enough, or in enough detail. Why? Generally, the discussion can be uncomfortable for both parties. However, becoming knowledgeable about the types of fee arrangements can increase your comfort level in dealing with this crucial part of hiring an attorney.

Tip: Remember: The specifics of a fee arrangement should be in writing.

The market rate for any given legal service varies by locality. A "fair" fee is what seems fair to you, based on your knowledge of going rates. Whether you are comfortable with a fee is likely to be based on the following factors:

• How much you can afford
• Whether the case is routine or requires special expertise
• The range of attorney rates for this type of case in your area

The fee arrangement you make with your lawyer will significant affect how much you will pay for the services.

Types Of Fee Arrangements

Here are several common types of fee arrangements used by lawyers:

Flat fee. The lawyer will charge you a specific total fee for your case. A flat fee is usually offered only if your case is relatively simple or routine.

Tip: Ask if photocopying, typing, and other out-of-pocket expenses are covered by this flat fee. Often the total bill is the flat fee plus these out-of-pocket expenses.

Hourly rate. The attorney will charge you for each hour (or portion of an hour) that he or she works on your case. If your attorney's fee is $100 per hour, and he or she works ten hours, the cost will be $1,000. Some attorneys charge a higher rate for court work and less per hour for research or case preparation.

Tip: If you agree to an hourly rate, be sure to find out how much experience your attorney has had with your type of case. A less experienced attorney will usually require more time to research your case, although he or she may charge a lower hourly rate.

Large law firms usually charge more than small law firms and urban attorneys often charge more per hour than attorneys practicing in rural areas.

Tip: Ask what is included in the hourly rate. If other staff such as secretaries, messengers, paralegals, and law clerks will be working on your case, find out how their time will be charged to you. Ask about costs and out-of-pocket expenses, which are usually billed in addition to the hourly rate.

Contingency fee. Under this arrangement, the attorney's fee is based on a percentage of what you are awarded in the case. If you lose the case, the attorney does not get a fee, although you will still have to pay expenses. The contingency fee percentage varies and some lawyers offer a sliding scale based on how far along the case is when it is settled. A one-third fee is common.

A contingency fee is usually found in personal injury cases, accidental claims, property damage cases, or other cases where a large amount of money is involved.

Referral fee. On occasion, an attorney who has accepted your case may refer you to another attorney who specializes in the area you need. Sometimes the first attorney will ask for a portion of the total fee you pay for the case. This "referral fee" may be prohibited under state codes of professional responsibility unless certain rules are followed. The rules usually include a requirement that client fees be split only if each attorney does some work, the client knows about the arrangement, and the total fee is reasonable.

Suggestions for Ensuring Cost Effectiveness

It is important to remember that a lawyer's fees are often negotiable. Your lawyer is unlikely to invite you to bargain over fees, and you may not want to bring the subject up. Keep in mind, however, that there are some situations in which attorneys are more likely to consider a lower fee. If your case is interesting, unique, or extremely lucrative, an attorney may be willing to negotiate. If the firm is actively seeking more work or is new to your locality, it may handle a case for less as a way to build its caseload.

There are two general situations in which you may wish to raise the issue of lower fees. First, if your case has the possibility of significant attorney's fees, you are in a stronger position if you are willing to shop around and to negotiate. It's wise to negotiate, for example, in personal injury cases. Most lawyers will propose a standard contingency fee for one-third of any damages that they win for you, nothing if they lose.

Tip: The contingency fee is designed to cover the risk the lawyer is taking; yet some experts estimate that at least one out of every five contingency fee cases involves virtually no risk.

It makes sense to sit down with several different lawyers before choosing one. Ask each to assess the merits of the case and the likelihood that you will receive money if you are successful. The consultations will be free and you will come away with a more realistic sense of what fee arrangements you should agree to. Generally, the higher the likelihood of success in a case, the lower the contingency percentage you may be able to negotiate. Some clients also prefer to pay their lawyers on a sliding scale. For example, 33 percent for the first $100,000 in damages, 25 percent for the next $100,000, and 15 percent above that.

You may be able to negotiate other arrangements that will save you money, including flat fees instead of hourly charges, hourly rates up to a prearranged maximum for the entire project, and fees based partly on the outcome.

Comparison Shop for Flat Fees on Simple Cases

When you need a simple transaction like a will, a real estate closing, or a power of attorney, you can comparison shop. Contracting for legal services is like any other consumer transaction in that the prices and the work product vary. Call several attorneys and compare their answers to the questions listed above. Only after you get a sense of the range of fees will you be able to determine which rate and which attorney best suit you and your budget.

Ask About Billing Method for Hourly Rates

A written agreement specifying the fee arrangement and the work involved is the best way of assuring clear communication between you and your attorney about the total cost of the case.

Tip: In some cases, it may save hundreds of dollars if you ask a lawyer to bill at 6-minute instead of 15-minute intervals. For example, if a lawyer's minimum billing unit is 15 minutes, each 5-minute phone call will be billed at one-fourth of the hourly rate. At 6-minute phone intervals, a 5-minute phone call costs just one-tenth of the hourly rate.

Choose a Lawyer with the Appropriate Qualifications

Most legal work is relatively routine. It often has little to do with complex legal theory or analysis, and much more to do with knowing which form to fill out and which county clerk will process it most quickly. Smaller firms, attorneys charging lower rates, and less experienced attorneys are often well suited for the broad range of legal work needed by many consumers. Recently graduated attorneys may offer to work for a somewhat lower price to compensate for the extra risk and time involved in becoming familiar with the specific area of law. Lawyers who charge $300 an hour and up are appropriate for very sophisticated trusts and estate work, corporate litigation, or complex criminal defense work.

Tip: Be wary of big law firms where you may get the impression that the young associate who has been assigned to your case (at a lower rate) is being supervised closely by the senior partners listed in the firm name. The associate may take three or four times as long as an experienced lawyer to draft the necessary papers. You might want to meet with the associate and the supervising partner before work begins to ascertain who is going to do what, and to get an estimate as to how much the work should cost. Such a meeting may prevent the firm from charging you for an associate's on-the-job training.

Offer to Perform Some of the Work

Discuss ways that you can help the attorney on the case. For example, if the attorney needs copies of birth certificates or other records, you can write the letter to request them and save your attorney the time needed to dictate and process the letter.

Splitting the work with an attorney also can cut the cost of writing a will or health-care power of attorney or setting up a trust. You can draft the document, using a standard form as a guide, and then present it to your lawyer for reviewing and finalizing the work. Make sure that your attorney is willing to do this kind of work and discuss the fee if major rewriting is needed.

Hire the Attorney to Act as Go-Between

Some lawyers are open to negotiating a lower fee if you are only looking for their legal expertise to write a letter to the other side to settle. You may wish to hire the attorney for this type of limited assistance initially and follow up yourself. If you are unsuccessful, you may wish to retain the attorney to further pursue the case.

Hire the Attorney to Act as Your Pro Se Coach

If you want to represent yourself in court (called "appearing pro se"), hire your attorney to act as a pro se coach who will review documents and letters that you prepare and sign. The attorney may also help you prepare for a hearing in which you represent yourself. This might be appropriate when appearing in small claims court to enforce a lease or collect bills owed to you, for example.

Not all attorneys will be comfortable in this role, but some, especially in smaller firms, may be interested in empowering consumers.

Choose a Lawyer Who Specializes in What You Need

You are likely to save money by choosing someone who has the knowledge and office systems set up to handle cases like yours cost-effectively. That attorney is also more likely to be knowledgeable about specific procedures relating to your case, expert witnesses in the area, and other attorney experts for consultation.

Note: A rapidly growing specialty in the legal profession is "Elder Law," which includes traditional areas of legal practice such as estate planning and probate, as well as public benefits such as Medicare and Social Security, and issues such as planning for long-term care placement and health-care decision-making. Some attorneys have begun identifying themselves as elder law specialists. Most of these do not specialize in all of the areas covered by the broad term elder law. Therefore, you should ask which areas an attorney handles.

Prepare for Your Attorney Meetings

Come prepared with all of the necessary information and papers. Ask questions to make sure that you are providing everything the attorney needs. Think about your legal problem and gather the information your attorney will need. Write down the names, addresses, and phone numbers of other people involved in the case. Write down the important events or facts. Bring any relevant papers such as contracts, letters, court notices, or leases. Keep copies of this information and provide it to your attorney. The more work you do to prepare, the less time your attorney needs to spend and charge you for finding the information.

Answer Your Attorney's Questions Fully

Your communications to your attorney are confidential. Pay close attention to the questions your attorney asks you and offer complete and honest answers. If you are not sure if a piece of information is relevant, ask your attorney. If your attorney knows all the facts as early as possible in the case, it will save time and money that might be spent later on further investigation or misdirected case development.

If the Situation Changes, Tell Your Attorney as Soon as Possible

You are the primary source of information about your case and your attorney will act based on the information you have provided. If something happens or if you find out new information which may affect your case, give the information to your attorney quickly. It may change what he or she is doing on your case. It may save the attorney's time and your money or save the attorney from heading in the wrong direction on a case.

Maximize the Value of Your Contacts with Your Attorney

Keep in mind that you will pay for virtually every minute you spend with your attorney. Consolidate your questions or information-giving into a single call. Pass on information in writing or to other office staff rather than speaking directly with the attorney, unless you have a specific reason to do so.

Caution: While a friendly relationship can facilitate the handling of your case, limit phone calls and meetings to the business of the case. You do not want to pay for a long, friendly conversation about other matters.

Examine Your Bill

Request that your attorney bill you on a regular basis. Even if you have agreed on a contingency fee and will not actually pay the expenses until the case is settled, you should periodically examine the expenses. Question any items that you do not understand or that are not covered in your fee agreement.

Caution: Your attorney may list the cost of attending continuing legal education seminars in the area of your case. Unless you have agreed to cover these costs, you should question this entry.

Step 7: Define Your Relationship And Stay Involved

In films or television, a client simply tells the attorney of the problem and the attorney, without regard for expenses or further consultation, solves the case. In real life, a partnership is necessary. You must state, at the outset, your expectations on how much you want the attorney to consult with you and which decisions (if any) he or she can make without consulting you. You must also discuss the details of your legal costs in the case.

There are many variations of the attorney-client relationship, from full representation to having the attorney act as a "pro se coach."

The bottom line is that the outcome of the case affects you much more than it affects your attorney. No matter what role you envision for your attorney, you should be the decision-maker on all major points in your case. An attorney is hired for his or her experience on legal procedures and familiarity with the appropriate court system, but the more fully informed you are, the better prepared you will be to make the necessary key decisions and to oversee the work of your attorney.

At a minimum, educate yourself about the general area of law relevant to your case by reviewing one of the many self-help legal manuals and gathering information from the attorney interviews you conduct. You can find out about courtroom procedures from staff at the court (although they may be reluctant), legal aid staff, or the law library or your public library.

Further, you can support the attorney by gathering documents and performing other agreed upon tasks. It may be wise both financially and in terms of your staying involved in the case for you to undertake certain tasks to support the work on your case. There are various tasks in the development of any case which do not require specialized legal expertise, e.g., compiling information, researching regulations or company policy, obtaining birth certificates or other documents, or reviewing the factual portions of documents prepared for court.

In making the decision about the degree of your involvement, ask yourself the following questions:

• How much time and effort can I realistically contribute?
• How much do I need to control (monitor) the day-to-day direction of the case?
• How familiar am I with this area of the law?
• How much is this case worth to me (financially)?
• How important is the outcome?

You will need to have clear agreement with your attorney about your relative roles and expectations. On one hand, your involvement should not hinder the attorney from exercising the expertise for which you hired the attorney. On the other, all options should be explained to you in clear language. Ask questions about the relative merits of a proposed step until you understand it.

Be wary of an attorney who makes strategic decisions without you, or who presents a proposed next step as necessary without explaining its merits and costs.

Here is a list of questions to be addressed, which can serve as a guideline:

1. Do you want your attorney to act as pro se coach or as your representative? What work can you provide on the case? How frequently do you want to receive a billing (or a list of expenses if a contingency fee)?
2. Do you want to review copies of pleadings (court papers) before they are filed? Receive copies after they are filed? Review some but not all documents? Which ones?
3. How often is it appropriate to meet? What benchmark should trigger a meeting?
4. How often do you want to talk to the attorney or receive a case update? Can staff convey the message? Will a short note be sufficient?
5. Are there spending limits or benchmark figures for expenses or fees which should trigger a client consultation before going ahead on the case?

Elder Law

Many attorneys who specialize in the elder law area are familiar with the other professionals (such as ombudsmen, social workers, geriatric care managers, or other elder care professionals) who can provide related services to older people. They may also be trained in the mental and physical effects of the normal aging process.

What Elder Law Includes

The broad range of legal areas covered by "elder law" includes:

• Estate planning, including the management of an estate during the person's lifetime and planning how the estate will be divided upon the person's death through wills, trusts, asset transfers, tax planning, and other methods.
• Long-term care planning, including nursing home issues such as quality of care, admissions contracts, prevention of spousal impoverishment, and resident's rights. It also includes life care or retirement community issues such as evaluating the proposed plan/contract.
• Retirement issues, including Social Security (retirement and disability and survivors' benefits) and other public pensions (veterans, civil service) and benefits as well as private pension benefits.
• Health care issue, including Medicare, Medicaid, Medigap insurance, and long-term care insurance.
• Housing issues, including home equity conversion and age discrimination.
• Planning for possible incapacity, by choosing in advance how health care and financial decisions will be made if you are unable to do so (methods include durable powers of attorney, health-care powers of attorney, living wills, and other means of delegating the decision making). The attorney may also be able to advise on conservatorship and guardianship proceedings in the event that the elder has not planned for incapacity.
• Age discrimination issues including bringing cases under the Age Discrimination in Employment Act.

Today most lawyers limit their practices to a few areas such as domestic relations, criminal law, personal injury, estate planning and probate, real estate, or tax issues. Even attorneys who list themselves as elder law specialists are unlikely to be expert in all the areas detailed above.

Do You Need An Elder Law Specialist?

The answer depends on your situation. If you already have a good working relationship with an attorney, discuss your particular legal needs with that attorney. Ask about your lawyer's experience in the issues typical of elder law. If the attorney is experienced in the areas of most concern to you, it is unlikely you will wish to go elsewhere. If the attorney is unfamiliar with elder law issues, ask the attorney for a referral.

Another reason you may want to seek out an elder law specialist is that finding the best solution is likely to involve a variety of other professionals such as physicians, home care agency workers, geriatric care managers, bank officers, and long-term care ombudsmen. An attorney familiar with this network can be very helpful. If needed, the attorney can act as a legal representative (fiduciary) if a client becomes incapacitated. Elder law specialists may work closely with financial planners, social workers, or geriatric care managers. This can be an advantage for many clients as a number of elder law issues involve both legal and non-legal solutions.

Note: It is always necessary to look for someone with the appropriate technical expertise and experience regardless of how the lawyer identifies himself or herself.

The National Academy of Elder Law Attorneys (NAELA) is a nonprofit professional association of attorneys specializing in legal issues affecting older persons. NAELA is not a legal referral service; however, it does sell a registry listing over 350 member attorneys nationwide ($25 including shipping and handling). National Academy of Elder Law Attorneys, Inc., 1604 N. Country Club Road, Tucson, AZ 85716, (602) 881-4005

The Area Agency on Aging

The Older Americans Act (OAA) requires your state office on aging to fund a local Area Agency on Aging (AAA) program that provides free legal help on non-criminal matters to people age 60 and over. Most of the over 644 local AAAs set aside funds to provide free legal assistance for those older persons who are in the greatest social and economic need. In many states, the AAAs contract with the Legal Services Corporation (LSC) funded programs described below. They may also set up their own programs or contract with private attorneys to provide legal services to older persons.

OAA legal services advocates provide representation in court or at administrative hearings, community education, and self-help publications. The OAA programs offer other types of assistance and services as well. For example, an advocate may assist an older person with a food stamp appeal and arrange for transportation to a nutrition site. The OAA legal services programs do a great deal of outreach to the community. Some attorneys spend as much as half of their time speaking at senior centers or visiting people in their own homes.

There are no income guidelines that clients must meet in order to qualify for services. However, the legal services provider and the Area Agency on Aging may set priorities about the preferred type of representation, such as obtaining government benefits, and may not be able to provide help in cases the agency considers to be a lower priority.

There is no cost to eligible clients. OAA legal services providers handle civil (not criminal) matters for persons age 60 or older regardless of income. Local offices set priorities for the types of cases they will handle. Not all cases can be handled.

Programs or offices providing free legal help to older persons can be identified by calling your local Area Agency on Aging listed in the government section of the telephone directory.

A national directory of OAA legal services providers (entitled Law & Aging Resource Guide) lists a state by-state breakdown of the addresses and phone numbers of each office and is available from the American Bar Association Commission on Legal Problems of the Elderly, 1800 M Street, NW, Suite 200, Washington, DC 20036, (202) 331-2297. Single state profiles are free. A complete copy of all state profiles is $20.

Other Sources of Legal Assistance For Senior Citizens

There are a number of sources of legal help for elderly people:

The Administration on Aging offers free pension counseling programs. It has offices in the following locations:

Region I- CT, MA, ME, NH, RI, VT: (617) 565-1158
Region II & III- NY, NJ, PR, VI, DC, DE,MD, PA, VA, WV: (212) 254-2976
Region IV - AL, FL, GA, KY, MS, NC, SC, TN: (404) 562-7600
Region V- IL, IN, MI, MN, OH, WI: (312) 353-3141
Region VI - AR, LA, OK, NM, TX: (214) 767-2971
Region VII - IA, KS, MO, NE: (816) 426-3511
Region VIII - CO, MT, UT, WY, ND, SD: (303) 844-2951
Region IX - CA, NV, AZ, HI, GU, CNMI, AS: (415) 437-8780
Region X - AK, ID, OR, WA: (206) 615-2298

The National Citizens' Coalition for Nursing Home Reform can locate an ombudsman in your area and provide general information on nursing homes.

1828 L Street, NW, Suite 801
Washington, DC 20036
Tel. (202) 332-2275

Legal Hot-Lines

In this section, we list publications helpful to those trying to find a lawyer and lists of sources for legal services for seniors and low-income people.

• The American Association of Retired Persons (AARP) and the federal government's Administration on Aging (AoA) sponsor statewide legal hot-lines that provide legal advice to all persons age 60 or older, regardless of income or the nature of their problem. The hot-lines are staffed by attorneys who give advice, send pamphlets, or make referrals to special panels of attorneys or to legal services programs.

Most (including the AARP and AoA-funded hot-lines) do not charge for the advice given. Cases which require additional service are referred to special panels of attorneys who charge reduced fees or to free legal services programs.

Other Free Or Low-Cost Services

• American College of Trust Estate Counsel has a national directory of lawyers specializing in estate planning.

3415 S. Sepulveda Blvd., Suite 460
Los Angeles, CA 90034
Tel. (310) 398-1888

• U.S. Labor Department Pension and Welfare Benefits Administration Field offices offer free help with pension problems.

Atlanta area: (404) 302-3900

Boston area: (617) 565-9600

Chicago area: (312) 353-0900

Cincinnati area: (859) 578-4680

Dallas area: (972) 850-4500

Detroit area: (313) 226-7450

Kansas area: (816) 285-1800

Los Angeles area: (626) 229-1000

Miami area: (954) 424-4022

New York area: (212) 607-8600

Philadelphia area: (215) 861-5300

San Francisco area: (415) 625-2481

Seattle area: (206) 553-4244

Washington, DC area: (301) 713-2000

Source: CPA Site Solutions

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This calculator will sort through the monthly payments, fees and other costs associated with getting a new loan. By comparing these important variables side by side, this calculator can help you pick the loan that works best for you.

Topics

• What should I do if a friend or family member asks me to cosign a loan?
• How can I get the best deal on a home equity loan or an equity line of credit?
• What are the costs of obtaining a home equity line of credit?
• Should I obtain a home equity line of credit or a traditional second mortgage loan?
• How should I determine which of several loan alternatives is best?

What should I do if a friend or family member asks me to co-sign a loan?

Many people agree to co-sign loans for friends or relatives, as a favor, as a vote of confidence, or because they just can't say no. Unfortunately, they often find that they've bitten off more than they intended to chew.

The cosigner of a loan agrees to be responsible for its repayment along with the borrower. While a lender will generally seek repayment from the debtor first, it can go after the cosigner at any time. (On the other hand, where a loan is guaranteed, the lender can usually go after the guarantor only after the principal debtor has actually defaulted.)

Finance companies report that most cosigners end up paying off the loans they've cosigned—along with late charges, legal fees and all. Not only is this an unwanted out-of-pocket expense, but it can also be an undeserved blot on the cosigner's credit record.

It's better to guarantee a loan than to cosign it. However, if you're willing to cosign a loan, at least seek the lender's agreement to refrain collecting from you until the borrower actually defaults and try to limit your liability to the unpaid principal at the time of default. Then stay on top of the borrower's financial situation to help avoid a default (for example, have the lender notify you whenever a payment is late). At least you can preserve your credit rating by nipping payment problems in the bud.

Cosigning An Account. You may be asked to cosign an account to allow someone else to obtain a loan. With cosigning, your payment history and assets are used to qualify the cosigner for the loan.

Tip: We recommend that you do not cosign a loan, whether for a family member, friend, or employee. Many have found that cosigning a loan only leads to trouble.

Bear in mind that cosigning a loan bears all the financial and legal consequences of taking out the loan yourself. When you cosign, you are signing a contract that makes you responsible for the entire debt. If the other cosigner does not pay, or makes late payments, it will probably show up on your credit record. If the person for whom you cosigned does not pay the loan, the collection company will be entitled to try to collect from you.

If the cosigned loan is reported on your credit report, another lender will view the cosigned account as if it were your own debt. Further, if the information is correct, it will remain on your credit report for up to seven years.

Tip: If someone asks you to cosign a loan, suggest other alternatives--such as a secured credit card—by which they can build a credit history. If you are asked to cosign for someone whose income is not high enough to qualify for a loan, you are actually doing them a favor by refusing—they will be less likely to be overwhelmed by too-high debts. At any rate, consult with your lawyer before cosigning, since state laws regarding a cosigner's liability vary.

Tip: If you have already cosigned for someone, and he or she is not making payments on time, consider making the payments yourself and asking the cosigner to pay you directly, in order to protect your credit rating.

How can I get the best deal on a home equity loan or an equity line of credit?

If you decide to apply for a home equity loan, look for the plan that best meets your particular needs. Look carefully at the credit agreement and examine the terms and conditions of various plans, including the annual percentage rate (APR) and the costs you'll pay to establish the plan.

Tip: The disclosed APR will not reflect the closing costs and other fees and charges, so compare these costs, as well as the APRs, among lenders.

Interest Rates. Home equity plans typically involve variable interest rates rather than fixed rates. A variable rate must be based on a publicly available index (such as the prime rate published in some major daily newspapers or a U.S. Treasury bill rate). The interest rate will change, mirroring fluctuations in the index.

To figure the interest rate that you will pay, most lenders add a margin, such as 2 percentage points, to the index value.

Tip: Because the cost of borrowing is tied directly to the index rate, find out what index and margin each lender uses, how often the index changes, and how high it has risen in the past.

Sometimes lenders advertise a temporarily discounted rate for home equity loans—a rate that is unusually low and often lasts only for an introductory period, such as six months.

Variable rate plans secured by a dwelling must have a ceiling (or cap) on how high your interest rate can climb over the life of the plan. Some variable-rate plans limit how much your payment may increase, and also how low your interest rate may fall.

Some lenders permit you to convert a variable rate to a fixed interest rate during the life of the plan, or to convert all or a portion of your line to a fixed-term installment loan.

Agreements generally permit the lender to freeze or reduce your credit line under certain circumstances, such as during any period the interest rate reaches the cap.

What are the costs of obtaining a home equity line of credit?

Many of the costs in setting up a home equity line of credit are similar to those you pay when you buy a home.

For example, these fees may be charged:

• A fee for a property appraisal, which estimates the value of your home
• An application fee, which may not be refundable if you are turned down for credit
• Up-front charges, such as one or more points (one point equals one percent of the credit limit)
• Other closing costs, which include fees for attorneys, title search, mortgage preparation and filing, property and title insurance, as well as taxes
• Yearly membership or maintenance fees

You also may be charged a transaction fee every time you draw on the credit line.

You could find yourself paying hundreds of dollars to establish the plan. If you were to draw only a small amount against your credit line, those charges and closing costs would substantially increase the cost of the funds borrowed.

On the other hand, the lender's risk is lower than for other forms of credit because your home serves as collateral. Thus, annual percentage rates for home equity lines are generally lower than rates for other types of credit.

The interest you save could offset the initial costs of obtaining the line. In addition, some lenders may waive a portion or all of the closing costs.

Should I obtain a home equity line of credit or a traditional second mortgage loan?

If you are thinking about a home equity line of credit you might also want to consider a traditional second mortgage loan. This type of loan provides you with a fixed amount of money repayable over a fixed period. Usually the payment schedule calls for equal payments that will pay off the entire loan within that time.

Tip: Consider a traditional second mortgage loan instead of a home equity line if, for example, you need a set amount for a specific purpose, such as an addition to your home.

In deciding which type of loan best suits your needs, consider the costs under the two alternatives. Look at the APR and other charges.

Tip: Do not simply compare the APR for a traditional mortgage loan with the APR for a home equity line--the APRs are figured differently. The APR for a traditional mortgage takes into account the interest rate charged plus points and other finance charges. The APR for a home equity line is based on the periodic interest rate alone. It does not include points or other charges.

How should I determine which of several loan alternatives is best?

Use the legally-required disclosures of loan terms to compare the costs of home equity loans.

The Truth in Lending Act requires lenders to disclose the important terms and costs of their home equity plans, including the APR, miscellaneous charges, the payment terms, and information about any variable-rate feature. In general, neither the lender nor anyone else may charge a fee until after you have this information.

You usually get these disclosures when you receive an application form, and you will get additional disclosures before the plan is opened. If any term has changed before the plan is opened (other than a variable-rate feature), the lender must return all fees if you decide not enter into the plan because of the changed term.

Credit costs vary. By remembering two terms, you can compare credit prices from different sources. Under Truth in Lending, the creditor must tell you—in writing and before you sign any agreement—the finance charge and the annual percentage rate.

The finance charge is the total dollar amount you pay to use credit. It includes interest costs, and other costs, such as service charges and some credit-related insurance premiums.

For example, borrowing $100 for a year might cost you $10 in interest. If there were also a service charge of $1, the finance charge would be $11.

The annual percentage rate (APR) is the percentage cost (or relative cost) of credit on a yearly basis. This is your key to comparing costs, regardless of the amount of credit or how long you have to repay it:

Example: You borrow $100 for one year and pay a finance charge of $10. If you can keep the entire $100 for the whole year and then pay back $110 at the end of the year, you are paying an APR of 10 percent. But, if you repay the $100 and finance charge (a total of $110) in twelve equal monthly installments, you don't really get to use $100 for the whole year. In fact, you get to use less and less of that $100 each month. In this case, the $10 charge for credit amounts to an APR of 18 percent.

All creditors—banks, stores, car dealers, credit card companies, finance companies— must state the cost of their credit in terms of the finance charge and the APR. Federal law does not set interest rates or other credit charges. But it does require their disclosure--before you sign a credit contract or use a credit card--so you can compare costs.

Source: CPA Site Solutions

While this calculator can't guarantee you will qualify for your new loan, it is a good check point to see if it is within your means.

To use the personalized budget tool, you just need to create a no-cost user web account.

Fill in as many questions as you can so your budget will be realistic. If you don't know the answer, just fill in as much as you know or leave the question blank. If you need to stop at any point, your entry will be saved and you can come back to finish your budget later.

The site will not ask for your social security number or bank account numbers. Your personal information will not be shared with anyone unless you're working with a professional on your budget. Everything you write on this site is for your eyes only.

Source: The Beehive

Should you consolidate your debt? This calculator is designed to help determine whether debt consolidation is right for you.

Enter your credit cards, auto loans and other installment loans balances by clicking on the "Enter Data" button for each category. Then change the consolidated loan amount, term or rate to create a loan that will work within your budget.

If you refinance your mortgage, the process will be similar to what you went through in obtaining the original mortgage. In reality, refinancing a mortgage is simply taking out a new mortgage. You will encounter many of the same procedures and the same types of costs the second time around. In this Financial Guide, we will give you some pointers on how to get the best possible deal.

Topics

• Who Can Benefit From Refinancing?
• How To Go About Making The Decision
• How To Determine Your Refinancing Costs
• How Would Refinancing Affect Your Tax Situation?
• Some Tips For Obtaining The Best Deal
• Sample Refinancing Savings
• Recommended Books

Who Can Benefit From Refinancing?

Refinancing does not make good financial sense for everyone. A general rule of thumb is that refinancing is worth while if the current interest rate on your mortgage is at least two percentage points higher than the prevailing market rate. This figure is generally accepted as the safe margin when balancing the costs of refinancing a mortgage against the savings. However, a rule of thumb is not ironclad: every individual’s circumstances need to be analyzed. If your loan amount and the particular circumstances warrant it, you might choose to refinance a loan that is only 1-1/2 percentage points higher than the current rate.

Tip: Lenders may be offering zero point loans and low-cost refinancing. Therefore, even if your rate change is less than one percentage point, you may be able to save some money by refinancing.

Most experts say that it takes at least three years to fully realize the savings from a lower interest rate, given the costs of the refinancing. You may find, however, that you could recoup the refinancing costs in a shorter time than three years. Again, every homeowner’s circumstances should be analyzed individually. Generally, refinancing can be a good idea if you:

• Want to get out of a high interest rate loan to take advantage of lower rates. (This is a good idea only if you intend to stay in the house long enough to make the additional fees worthwhile.)
• Want to convert to an ARM with a lower interest rate or more protective features (such as a better rate and payment caps) than the ARM you currently have.
• Want to build up equity more quickly by converting to a