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Archive for Friday, August 12, 2005

Paying off credit-card debt worth refinancing

August 12, 2005

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Q: My home is worth about $200,000, but the outstanding balance of my mortgage is only $85,000. If I refinanced my mortgage and took out an extra $30,000 in cash to pay off my high-rate credit cards and purchase a used car, would I have to declare the $30,000 as "income" and pay taxes on it when I complete my tax return next April 15?

A: No, the proceeds of your refinance loan would not be taxed. The Internal Revenue Service never taxes borrowed money.

With fixed mortgage rates near all-time lows, borrowing money against the built-up equity in your home and then using the cash to pay off higher-rate credit cards and meet necessary expenses can be a very wise move.

You'd not only save hundreds or even thousands of dollars in finance charges by eliminating your higher-rate debt, but would add to those savings because interest paid on a home loan - unlike finance charges on credit cards and personal loans - usually can be deducted on your annual income-tax return.

Talk to a tax professional about your idea. If you then decide to follow through with your refinancing plan, make sure to keep your future credit-card purchases and other spending in check so you don't wind up neck-deep in debt.

Q.: How much does a typical real estate salesperson earn in a year?

A.: According to a new study by the National Association of Realtors, the median income of the trade group's sales associates totaled $38,300 last year. In other words, half of all salespeople made more than that amount, and half earned less.

Though home sales and prices have been hitting record levels in the past few years, it's interesting to note that the $38,300 in 2004 median earnings was actually down 8 percent from a $41,600 earnings median when a similar study was performed in 2002.

Experts blame last year's overall earnings drop on a nearly 30 percent increase in the number of new licensees between 2003 and 2005. It takes most new agents at least a year or two to create a steady stream of sales, and their relatively modest income in the early part of their careers drags down the overall averages.

Not surprisingly, most longtime agents earned far more than their newly minted counterparts. The median income for a sales associate with six to 10 years of experience in 2004 was $57,100, and $83,400 for those with at least 26 years of experience.

Brokers who own their own company but don't personally sell homes - instead sharing in the revenue generated by all the associates who work for them - had a median income of $79,900 last year. Brokers who own their own firm and also work directly with buyers and sellers had a median income of $89,100.

Q: I am about to purchase a retirement home in a Southern city that was hit by the summer storms. Is flood damage covered by a typical homeowners insurance policy?

A: No, an ordinary homeowners policy doesn't directly cover flood damage. For such protection, you must purchase a separate policy sold through the federally backed National Flood Insurance Program. For information, call (800) 480-2520 or click on www.floodsmart.gov.

While it's always wise for homeowners in areas prone to hurricanes and floods to buy separate flood insurance through the program, a standard homeowners policy offers a lot more protection than you might think when a violent storm hits. For example, if a storm knocks a tree onto your house, a typical policy will pay to have the damage repaired and up to $500 to have the fallen tree hauled away - even if you don't have separate flood insurance.

A standard homeowners policy also will pay if your roof is damaged and rain ruins your floor and furniture. Similarly, if a storm sends flying debris through your windows and subsequently leaves your rooms a soaking mess, homeowners insurance likely will pay for repairs and to replace most items that were destroyed.

The list can go on and on. The bottom line here is that you should never automatically assume that a particular event isn't covered by your existing insurance. Always review your policy after a loss and then call your agent to determine if you can be reimbursed - but don't forget also to ask whether filing a claim might send your future premiums soaring or result in your coverage being canceled altogether.

- David W. Myers is a 20-year veteran of the newspaper and magazine business, having previously covered real estate for the Los Angeles Times and Investor's Business Daily.

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