HELP! WE'RE SLAVES TO A HOUSE WORTH LESS THAN ITS MORTGAGE
(MONEY Magazine) – Q Please help two ''mortgage slaves.'' We are in the ninth year of a 30-year, $128,000 mortgage at a whopping fixed interest rate of 14%. We'd refinance, but we can't. Thanks to a bad real estate market, our home has declined in value from the $135,000 we paid in 1982 to only $116,000 -- or $7,000 less than the $123,000 we still owe. The bank won't lend more than 90% of its value, or $104,400. We earn good salaries -- $95,000 a year -- and have $35,000 in savings, but these $1,517-a-month mortgage payments are killing us. Should we return our keys to the mortgage holder and run? Ron and Karen Sands Carrollton, Texas A What you're going through is like taking a pickax in the cabeza, but don't just abandon the property. Doing that would ruin your credit rating, possibly provoke a lawsuit from the bank and, worst of all, deprive you of a place to live. Instead, I recommend investing some of your $35,000 savings to refinance. Even if you hold back $11,000 -- two months' income, after taxes -- for emergencies, and pay $4,000 to $5,000 in closing costs, you will have $19,000 left -- enough to pay your loan down to the $104,000 that the bank will refinance. True, it's galling to pay, in effect, a full $135,000 for a $116,000 house. But if you get a 30-year adjustable mortgage with a starting rate of 6.5%, your monthly payment will drop to $657 -- saving you more than $10,000 in the first year alone. And your investment may pay off in the future: Ron Witten, president of M/PF Research, a Dallas real estate consulting firm, thinks your market has bottomed out and could start rising next year.
Q My wife and I use the Value Line Investment Survey to research stocks, but many of the small-capitalization issues we want to follow aren't listed. Can we get data on these small-company stocks? Richard Frickmann Santa Barbara A Yes, but only by investing sums of money so sizable that you could use them to start your own very, very small-cap company (a caplet, I guess). For $880 a year, you can buy Standard & Poor's Stock Reports Index: Over the Counter & Regional Exchanges, four phone-book-size volumes that list everything you ever wanted to know about small companies (except board room gossip). Then too, there's Moody's Over-the-Counter Unlisted Manual ($1,095), which covers weensy companies that are not listed on NASDAQ's national market system. To avoid paying those humongous subscription fees, head down to the local library, which may have either or both listings. Or subscribe to OTC Insight ($195 a year; one sample issue free; 1600 School St., Suite 105, Moraga, Calif. 94556; 510-376-1362), a monthly newsletter on over-the-counter growth stocks. Hulbert Financial Digest, which tracks newsletter investment advice, says OTC Insight led the small-cap field over the past three years with stock picks that were up 303.6%.
Q Last year my purse and checkbook were stolen and the thief forged some checks. I notified the various credit reporting firms and filed affidavits with them saying the checks had been forged. But stores still won't take my new checks. Why is this happening? Linda Fernandes La Mesa, Calif. A Not because you're lucky! Seriously, two of the companies involved -- TeleCheck and Telecredit, a subsidiary of Equifax, the credit reporting bureau -- were a bit sloppy. When either company receives an affidavit of fraud -- and they each got one from you -- they flag your driver's license number. Unfortunately, that number, like your Social Security number, generally stays with you forever. So since you and the forger are still using the same tainted driver's license for ID, your checks are being refused even though you opened a new checking account. TeleCheck merchants are supposed to give you a special telephone number to call if a check is refused so that you can clear up the problem right in the store, but apparently none of them did that. Telecredit was supposed to ask for a confidential password to distinguish you from the forger, but it didn't. Your luck may be changing, though: the forger was apprehended, and both firms have now dropped your driver's license from their hit lists.
Q Our investors group uses a computer data base that often refers to the ''alpha'' rating of a stock. What is that? Doris A. Berry Columbus, Ohio A Any good investing text will define alpha, but since the definition may sound like it's written in Urdu, I will translate. To understand alpha, you must first know about beta (which seems backward to me, but never mind). Beta measures a stock's price volatility -- or risk -- compared with the market in general (usually defined as the S&P 500 index), which is arbitrarily assigned a beta of 1. A stock with a beta of 1.5, then, trades at prices that are 1.5 times as volatile as the market. Now, in a perfect world, that risky stock should earn correspondingly more than safer investments do. Suppose that safe government-backed instruments like T-bills are paying 4% a year, while the market is returning 10%, meaning you are anticipating a six-percentage-point bonus for risking your money in the market (with its beta of 1) rather than accepting the secure 4%. Under those circumstances, an individual stock with a beta of 1.5 should return nine points (1.5 times six points) more than the risk-free level, or about 13% a year. Of course, the world isn't perfect -- as you may have noticed -- and that's where alpha comes in. Alpha is simply the difference between a stock's expected return, based on its beta, and how it really ends up performing. Suppose the stock above actually gained 16% last year, for example. Then it would have an alpha of plus three percentage points ^ (the real 16% minus the expected 13%). A stock with a positive alpha is posting high gains for its level of risk. Conversely, one with a negative alpha gives you less bang for your beta.
Q I am leaving the Air Force soon and have to choose between two voluntary separation packages: a lump-sum $31,000 or an annual $6,200 for 28 years. Which choice is best for someone who will need money for retirement in about 25 years? Because of cutbacks, thousands of G.I.s face similar decisions. Cleo Griffith Kaiserslautern, Germany A Your personal peace dividend is best taken as an annual payment. You can't roll a lump sum over into an Individual Retirement Account, because the money was not part of a qualified pension plan. So you would have to pay taxes on it, leaving you with only $22,320 (in the 28% bracket). If you invested that sum at a conservative after-tax 6% a year, it would grow to $114,000 in 28 years. But if you invested the $6,200 each year ($4,464 after taxes) instead, earning the same 6%, it would grow to nearly $306,000.