Florida homeowners who are entitled to a share of the state's $23-million settlement with Household International finally know how much they are likely to collect. The good news is that they can use the money, which is supposed to be mailed out in December. The bad news is that it will not be enough to extricate many of them from the lender's grasp.
Although Household never admitted wrongdoing, the money is compensation for the pain its customers endured, including outrageously high loan origination fees and prepayment penalties.
Since writing about the Household settlement in October, I have heard from dozens of the company's customers. The common theme in their stories is desperation. They spill the details of divorces, deaths, serious medical conditions and lost jobs before I can stop them.
Up to their necks in debt, many saw Household's willingness to lend them money as a way out of their problems. Unfamiliar with financial matters and unable to understand legal paperwork, they did not realize what they were getting into.
One St. Petersburg couple I wrote about two years ago waded into a financial swamp by depositing a Household check that came unsolicited in the mail. They did not understand they were borrowing money at 24 percent interest. Then they paid more than $8,000 in fees to trade in a 7.375 percent FHA mortgage for a Household mortgage at 11.092 percent interest, topped by a Household home equity credit line at 18 percent interest. Now they owe more than their house is worth.
The outcome: They are trapped, unable to sell or refinance. Sadly, walking away from their house and filing for bankruptcy is probably their most feasible alternative.
This couple's share of the settlement is $928, although it could be more if some people who are eligible fail to return the form by the Oct. 14 deadline. In exchange, they must give up their right to sue separately. The settlement covers those who took out mortgages between Jan. 1, 1999, and Sept. 30, 2002. Information is available at www.household-beneficial-settlement.com or by calling 1-888-780-2156.
Q. My spouse and I have an opportunity to invest in a new business that we have full faith in. We will need to contribute $100,000. Should we get a home equity loan on our house, which is paid for and worth about $210,000? Should we cash in our IRA, which is worth about $80,000, or take a loan from my spouse's 401(k), which is worth about $350,000? We have no other substantial assets. Most people say a home equity loan, but that makes me nervous. We are in our 40s and we feel overwhelmed with this decision.
Investment "opportunities" that require a choice between mortgaging your house and invading your retirement savings make me nervous.
New businesses are risky. Unless you and your spouse are planning to run this business, do not even consider putting up this money. Investing in a new business to help out a friend or relative is a quick way to lose both the money and the relationship.
Before you agree to part with a dime, have an objective third party, such as a certified public accountant, review the business plan and financial projections. If this is a franchise, talk to franchisees about their experiences. Visit some of the locations. Research the company and the background of its top people. Do not part with $100,000 just because something sounds good.
Of the three options you presented, a mortgage would be the best way to raise $100,000. The other options? You would have to pay income tax plus a 10 percent penalty on any retirement savings withdrawals. That means you would probably have to withdraw $135,000 (the amount will vary with your tax bracket) to net $100,000.
Borrowing from a 401(k) plan is restricted, if loans are even permitted. You can borrow no more than $50,000 and the money would have to be paid back within five years unless you were borrowing to buy a home. If withdrawals are permitted, they will be restricted to qualifying hardship cases.
The problem with taking out a mortgage is that you will be risking your house. Is the business going to generate enough money to pay back the mortgage? If it does not, where will you get the money to pay it back?
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.
