Time is ripe for restructuring finances


January 16, 1991|By JANE BRYANT QUINN

NEW YORK -- In this recessionary economy, don't just sit tight. Use the circumstances to restructure your personal money so that when this cloud passes you'll stand on stronger financial ground. Five ideas to consider:

(1) Buy a house if you believe that your job is secure. Prices are weak in most parts of the country, and mortgage-interest rates are falling. That's a combination that rarely lasts very long. Lower rates usually bring out buyers, and house prices start up.

The interest rate on adjustable-rate mortgages averages 7.8 percent for the first year (including teaser rates that can rise by as much as two points in the second year), according to HSH Associates in Butler, N.J. Thirty-year, fixed-rate loans at 9.7 percent are the lowest in about four years. But lately, fixed rates have risen a bit.

(2) Refinance your mortgage if you have a high-rate loan. Last summer, adjustable-rate mortgages jumped to about 10.5 percent. Borrowers whose loans adjusted then are paying more than the going rate.

In general, consider refinancing if your new mortgage will cost 1.5 percentage points less than your old one. Compare the up-front costs of refinancing with the monthly savings on your loan repayments. The switch usually makes sense if you can make up those costs within two years. First Visit your own lender, who might redraw your loan for less than other lenders charge.

For the lowest monthly payments in the first year, jump to a new ARM. Your payments will doubtless rise in the second year, but you'll havesaved a goodly sum. Some borrowers hunt for a new ARM every couple of years. If you'd rather switch to a fixed-rate loan, you might want to gamble on even lower rates by March or April as the recession rolls on. A good rate to wait for: 9 percent to 9.25 percent.

(3) Save more money. You cannot rely on gains in the value of your house to substitute for the money you're not saving yourself. Those gains may not come. As backup, you need a regular savings program -- either automatic payroll savings at work or automatic monthly transfers from your checking account into savings or into a mutual fund.

Assuming that the recession deepens, interest rates will fall further. The savings you keep in a floating-rate money-market account will earn less and less. Consider reinvesting the funds that you don't need right now in certificates of deposit or Treasury securities.

Treasuries can be purchased, at no sales charge, through any Federal Reserve bank or branch. (Ask your own bank where the nearest Fed is.)

For the highest CD rates in the country, take a $34 trial subscription to the newsletter 100 Highest Yields, 860 Federal Highway One, North Palm Beach, Fla. 33408. Some of the institutions it lists are near collapse, but others carry top safety ratings. The newsletter puts three stars next to the names of the institutions rated the safest by Veribanc in Woburn, Mass.

(4) Enlarge your financial reserve. The traditional reserve -- three months' income on tap -- is not sufficient for the freshly unemployed white-collar class. Jobs don't come easily to a banker or broker out on the street. You should aim for enough ready cash to support yourself and your family for a year, in addition to any severance pay.

That doesn't mean one year's income in the bank. It means that much money somewhere on tap -- in cash savings, readily salable investments such as stocks and mutual funds, and some borrowing power on credit cards or a home-equity line.

(5) Buy stock-owning mutual funds on a regular monthly program for your long-term retirement plan. "Bad" markets mean great prices for those who don't expect to cash in their fund for 10 years or more.

What if there's war? Interest rates probably would leap and stock prices plunge. For bargain-hunters, stocks would become even better long-term buys. But you'd want to put your borrowing plans on hold.

2& 1991 Washington Post Writers Group

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