New landlord has second thoughts about renting out old home

Q: We have just bought a second home in the Boston area where we believe the school district is better. We need to be here for only six years, so we decided to take out a seven-year, interest-only loan for $519,000. Meanwhile, we're holding onto our first home by renting it. I am rethinking our plan in light of the possibility of a bubble burst in real estate. How might that affect our situation? We like our second home and are willing to sell the first house but the financing is wrong. Should we try to refinance so soon? Or should we just stick to our plan and when the time comes - six years from now, sell the second home and return to our original home and its lower mortgage payment?
T.O., via e-mail

A: A real estate bubble will affect your owner-occupied property only if it bursts just before you sell, says Andy Keeler, a certified financial planner in Dublin, Ohio. He believes it is unlikely that property values will see a prolonged recession, though, and since you probably purchased your first home years ago, you already have built equity in it.

A downturn in real estate values may cause rents to fall, which is likely to pinch your monthly cash flow from renting your first home. But once again, since you have owned it for a while, Mr. Keeler, says you may be able to absorb a reduction in rental income.

"I think your plan is pretty sound, but you must keep a strong stomach," says Keeler.

Q: I worked for the US Health Service for 23 years and for other agencies for which I receive an annuity plus Social Security payments. I plan on filing for bankruptcy as I have three credit cards on which I cannot make the payments. How might bankruptcy affect my annuity or Social Security check?
L.S., Colorado Springs, Colo.

A: You will continue to receive both Social Security and annuity payments in the event of a bankruptcy, says Osmond Baptist, president of the Financial Planning Association of Georgia, but you will probably have to

sacrifice some of that income to satisfy whatever debt-management arrangement a bankruptcy judge might decide.

But before going to court, Mr. Baptist recommends that you contact the nearest Consumer Credit Counseling Services Center and ask them to review your circumstances. If you have been using credit cards to finance purchases of necessities, then the problem may go beyond debt counseling and raise issues of public assistance. If you own your home free and clear, perhaps a reverse mortgage is a workable option.

Too many people assume bankruptcy is the first, rather than the last resort when faced with unmanageable credit-card debt. Many more labor under the impression that declaring bankruptcy is without cost (financial or emotional) or consequences, he says.

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