3 percent interest and you’ll have about —Suzy P. Suze Orman $80,000 in annual income. That’s a lot more Enterprise, Oregon than you need. I recommend sticking with
My husband and I are in our late 40s. reinvest the proceeds from the zero-coupon
We should net just over $2.5 million municipals as they mature into a regular after the sale of our house. We need a municipal bond. This is exactly how I have yearly income of at least $50,000 from this invested my own money. money. Where can we invest so we can live off the interest and/or dividends and still am 64 and recently widowed, with an an-hang on to the principal? I nual pension of $85,000. I have no debt,
Given that sizable chunk, you can reach children. Should I spend $600,000 of that your $50,000 annual income goal by sticking money and purchase a house? Where with bonds rather than more volatile stocks. should I go for advice on what to do with
Put the money in municipal bonds earning my money?
KEITH LATHROP
AAA-rated bonds that are insured. Here’s some food for thought: Why not
I recommend splitting your windfall into just rent close to your family for six months two equal pieces. Invest half the money in a to a year so you can catch your breath and find though one way is typically a lot faster than bond laddering technique, where your long- out which area you like the best? Buying a the other. est holding has a seven-year maturity. Put homefor$600,000isanimportantdecision. The slow way to build up equity is one-seventh of the money in an AAA-rated If you ultimately decide you want to buy through your monthly mortgage payments. A insured municipal bond with a one-year matu- a home close to your family, it sounds like part of each payment goes toward paying off rity, another seventh in a bond with a two-year you are financially on solid ground to go for the principal—the mortgage balance—rather maturity and so on, all the way out to seven it. I assume the $600,000 would be to buy than the interest you owe on the principal. years. This way, if interest rates go up you the home outright, without a mortgage. When you take out a mortgage, the lender have money maturing every year that you can That’s fine, as long as you’re sure that the wants all of its interest—the money it makes reinvest at a higher rate. Invest the other half $85,000 pension is enough to cover your liv- on the deal—as fast as possible. in zero-coupon municipal bonds using the ing costs. Remember that while you won’t So in the early years of your mortgage same bond laddering strategy. have a mortgage, you are probably looking you pay mostly interest, not the mortgage bal-
You won’t be paid interest outright. In- at $12,000 a year to cover your property tax ance. That’s why, after 15 years of payments stead, you buy the bond at a steep discount on and home insurance. on a 30-year mortgage, you still owe almost its face value, and the interest the bond earns You should be super conservative with 70 percent of the original loan amount.
is reinvested back into the bond. When the your money until you decide what you really The second way to build equity is from bond matures you receive the full face value. want to do. It belongs in a good money-mar- the house appreciating in value. You can refi-
As time goes on, if you find that you ket account or a few short-term CDs. Don’t nance into a new mortgage that is based on
need more money to actually live on, just listen to anyone who tells you to invest it in the appreciated value of the home; this is
stocks or a bond mutual fund that has an A or what’s known as a cash-out refinance.
QB in its name (that means there’s a sales com- But be very careful here. Closing costs on
&Amission you will have to pay). the refinancing (you are paying off your old
Move slowly and move safely. Listen to mortgage and getting a new mortgage) of a
your instincts, not anyone else. $200,000 mortgage could run you $6,000. It
As I always say, no one will ever care makes no sense to shell out that dough if you
more about your money than you will. So plan on moving in a few years.
take your time in getting comfortable with The next trap is that when folks refinance
your new life and learn what will make you they tend to go for a new 30-year loan. This
most comfortable financially. is not wise. Let’s say you bought a home and
took out a 30-year mortgage and you have
My husband and I are trying to figure been paying that mortgage for five years, so
out the difference between paid you have 25 years of payments left. Now you
equity and appraised equity. Are they refinance, but instead of having only 25 years
treated the same way if you want to refi- to go you again have 30. That’s five extra
nance your home? years of interest payments! C
Ask Suze Orman
Send your personal
finance questions to:
Q&A with Suze Orman
The Costco Connection
P.O. Box 34088
Seattle, WA 98124-1088
Or fax to (425) 313-6718 or e-mail
to suze@costco.com. Please include
“Suze Orman Q&A” in the subject line.
Suze will answer selected questions
in this bimonthly column. She
regrets that unpublished questions
cannot be answered individually.
Suze can be contacted at www.suzeorman.com.
The good news is that equity is equity; it doesn’t matter if it is built up from your mortgage payments or from appreciation—
References:
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