 Don't
switch to option ARM
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 Dear
Dr. Don,
I am currently 27 years old and I am looking into additional
ways to save retirement money over the long haul. My wife and I have two young
children (both 6 years old) and we currently put aside $2,000 annually for their
educational IRAs.
I plan to begin a Section 529 plan in 2007 to take the place
of their education IRA to help decrease their qualified assets when they would
become of college age, for financial aid purposes. My wife and I both have ROTH
IRAs that we each contribute $4,000 to annually.
My question is:
Should I consider some type of option ARM mortgage for my roughly $350,000 of
mortgage debt at 5.25 percent fixed for 30 years (currently it has approximately
29 years remaining) to enable us to stash away more money early on? It would seem
I could put a great deal aside over the first five years and perhaps refinance
into something else before the loan would go into the higher rate. We have excellent
credit and are disciplined enough to save the additional cash flow.
I currently contribute to the 6 percent employer match at my job. I make a little
over $100,000 per year. We live comfortably. However, at times, with our aggressive
savings plan (right around 20 percent of our net pay) it would seem nice to have
additional cash coming in, much of which I would like to invest to help retire
early. My wife stays home with our kids and has no plans of returning as we would
like to have at least one more child.
Can you advise me what would
be best in our case? Thank you for your time.
-- Jeremy Jump-start
 Dear
Jeremy,
You're doing a lot of things right, like investing for your
retirement in your 20s, setting aside funds for your children's educations and
contributing up to the limit of your company's matching program in your 401(k)
before contributing to your Roth IRA accounts. The decision to fund the Roth IRAs
over making additional (unmatched) contributions to your 401(k) is
a question for you and your accountant to settle.
I don't see refinancing to an option ARM as a viable
strategy in allowing you to put additional money toward retirement.
The option in the option ARM is a decision as to how big a mortgage
payment you'll make each month. It can range from a minimum payment
that is less than the interest expense for the month, that will
involve negative amortization, to a fully amortized mortgage payment.
The teaser rates on these loans don't hang around for long, and
the fully indexed mortgage rate is likely to be substantially higher
than your 5.25 percent 30-year, fixed-rate mortgage.
In the early years of your mortgage you're not doing much
more than covering the interest expense with a fixed-rate mortgage, and you've
got a great interest rate, so why chase after an option ARM when you've got a
great rate on your current mortgage with no additional expense in closing on a
refinancing? The financial aid implications of Coverdell Education
Savings accounts (they're not called education IRAs anymore) versus Section 529
college savings plans isn't easy to sort through. Try plugging "Section
529" into Bankrate's search feature for a variety of information on investing
for your children's education. You can also take a look at
the "Financial
Aid" tab at SavingforCollege.com. A Morningstar Advisor article,
"College
Planning Q&A: Financial Fuzziness from the Feds," also has a nice
discussion of how your tax-advantaged college savings are treated in the financial
aid process. Talk to your tax professional for advice specific to your situation.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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