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Question for the Money Doctors

Question submitted on Sep 22, 2011.

Question

A friend of my husband convinced him that we should take our savings from the bank and put them in a Primerica fund because you get 12% interest rate. I think that’s too good to be truth. His friend also wants us to get in mortgage plan with Primerica to reduce the 30yr loan to a 15 to 12 yr plan. Is that possible?

Answer

If your savings is meant to be your cash reserve - it should be in a very safe place. It might not earn a lot of interst, but at least it is safe. This is money you cannot afford to put at risk.

At the bank, there is FDIC insurance so your money is safe. Unfortunately interest rates for savers are very low right now and it is expected to continue to be low.

It is tempting to look at other places to put your money especially when they promise high returns.

When evaluating a mutual fund, here is what you should consider:

1. Get a copy of the prospectus. The prospectus will tell you about the fund, it''s investment policy, the type of investments used, resumes of the fund managers, expenses, risks, past performance, etc.

2. Get information from third party sources such as Morningstar (www.morningstar.com), Lipper (www.lipperweb.com), Money Magazine, Kiplinger, Consumer Reports, etc. You can type in Primerica into a search engine like Google, Bing, Yahoo, etc. and read up on reviews about them. Yahoo Finance (finance.yahoo.com) has some good resources to help you learn more about this investment.

3. Learn about the expense ratios for the investment. Is there an up front commission? Is there a redemption charge if you sell? What are the ongoing expenses?

4. Learn about the risk of loss. How volatile has this fund been in the past? What types of investments are in this fund?

5. Look into complaints such as the SEC, FINRA and other regulatory bodies. Are their licences current? You should also check with the Better Business Bureau.

6. Look into the motivation behind your husband''s friend''s advice - he is getting compensated for it? How much will he earn if you followed his advice?

Regarding the mortgage question, if you refinanced into a 15 year or 12 year loan, can you afford the payments? These payments will certainly be higher than a 30 year mortgage. Please be sure to understand all the terms and conditions of this mortgage. Also, find out how much your husband''s friend will be compensated for this transaction.

What are the terms of the loan? What is the interest rate? Is there a prepayment penalty?

Before you make these big deicisons, please do your homework first.

I hope this is helpful and good luck!


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