award to their emergency fund, which has dwindled down to $4,600, Laylock recommends the following:
OBTAIN AN INTEREST-ONLY MORTGAGE
The couple’s first mortgage of $126,500 has an 8% Adjustable Rate Mortgage (ARM) rate. The home equity line on their inherited home has a 9.5% ARM rate and a $39,000 balance. To maximize their wealth, the Jacksons will have to faithfully make payments on their first mortgage and home equity loan (currently $928 and $360, respectively, per month) until August 2003, when their credit score should improve enough for them to refinance both loans to interest-only mortgages. Interest-only mortgages
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allow borrowers to pay interest, but no principal, through the life of the loan, which is usually 15 years. The result: lower monthly payments. Should they meet the credit score requirements for this option, the Jacksons’ two mortgage payments will total approximately $690 per month. The downside to an interest-only mortgage? If the Jackson’s property lost value, they would have to make up the loss against the original mortgage if they wanted to sell the property (but they’d have to do the same with a traditional mortgage).
USE POSITIVE CASH FLOW TO INCREASE SAVINGS
If they are able to reduce their total mortgage payments from $1,448 to approximately $690, the Jacksons will have positive monthly cash flow equal to $758 (or $9,096 per year). Were they to invest that money at 8% over the next 20 years, the value would be $551,000. This would enable the Jacksons to begin contributing $250 a month to a Roth IRA and to add to the 529 college savings plan they opened for Paris in September 2002. They could also contribute regularly to their savings account. Laylock suggests that when the Jacksons refinance their inherited home this summer, they should take out additional funds to eliminate Kim’s $16,000 student loan, Jacqueline’s father’s $7,000 car note, and any remaining home-repair costs.
RESTRUCTURE INSURANCE
The couple is paying $1,535 annually for a $539,000 insurance policy for Jacqueline, a $321,000 policy for Kim, and a $20,000 policy for Paris. They should reduce those costs by getting a combination of permanent and term life insurance policies. The Jacksons should also begin considering some form of permanent life coverage. Jacqueline’s father cashed in his life insurance six years ago, which has left him with no coverage. The Jacksons also have $150,000 in life insurance to cover their mortgage in the event of their death. Laylock advises getting a term-life policy because, in most cases, the death benefit of the credit insurance is reduced with the balance of the mortgage; once the mortgage goes away, so does life insurance coverage. In order to increase the deductibles on their auto and homeowner insurance policies, Laylock suggests that the couple increase them to $1,000. They can then purchase a $500,000 umbrella policy (at about $65 per year), which will protect them in case of a lawsuit due to accidents.
DRAFT LIVING WILL AND OTHER LEGAL DOCUMENTS
The Jacksons only have a simple Power of Attorney to protect Jacqueline’s