Self-Directed IRA Saves Family Finances: Win-Win-Win

By Carl Fischer

Sam and Barb both work, have two girls 7 and 9, own their home worth $225,000 and have a mortgage on their primary residence owing approximately $130,000.  Between them both they had 12 credit cards with a total balance of $50,000 at an average interest rate of 25%.  The credit cards started out with teaser rates and 0% balance transfers for a fixed period but ended up at the high rates. 

The minimum payment for the credit card averaged $800.00 per month, which did not even cover the interest.  Each month they were falling deeper into debt (approximately  $250) and had less money to live.  They saw their financial future spiraling downward in dire peril.

They tried to get a bank home equity loan or 2nd mortgage to pay off the credit cards but their credit score was now low and the income to debt ratio was unacceptable even though they had equity in their home.. 

They had a friend, Jim, who had talked about how he used his self-directed IRA to lend money.   Sam and Barb went to see him to find out if he could help.  They explained their situation to Jim.

Jim told them with the equity in their home he would lend them the money at 12% and one point origination fee to pay off their credit cards, thus improve their credit score so they could refinance with the bank in 6 to 18 months. They borrowed $50,000— paid off all their credit cards and made interest only payments to Jim in the amount of $500.00/month. The loan/2nd mortgage was completed in less than a week and reduced their interest payments by more than 50%, consequently increasing their monthly cash flow by more than $300.00/ month. In addition, they had stopped the downward spiral and were able to start saving as opposed to incurring more debt each month. Sam and Barb were thankful for the advice and appreciated the loan/2nd mortgage. 

A year to the date, that they had talked to Jim, Sam and Barb were able to secure a 2nd mortgage bank loan at 8% and paid Jim back.  In addition, they had a reduction in auto and home insurance because of their 730+ credit score. The interest was now tax deductible as well, which was an added bonus to their finances.

Sam and Barb now use one credit card each, pay it off every month, and have opened IRA’s for themselves and Coverdell Education Savings Accounts for their two daughters.  Sam and Barb recognize they are simple people and both acknowledge they don’t’

 know much about stocks and bonds but they do know people who could be helped like they were.  They have vowed to “pay it forward” for two reasons:

  1. to help others and
  2. to help themselves.

In summary, Sam and Barb were happy to reduce their interest rate from 25% to 12% and ultimately to 8% plus making it tax deductible.  They are now able to save for their retirement and their daughters college.  Jim was content making 12+ % return on his money, tax free in his Roth IRA, with a secured loan and mortgage   He knew of friends making less than half that in CD’s. The loan officer at the bank was happy to help with the 2nd loan when the credit score and the debt to income ratio improved.  I assume the credit card company was happy to be paid off without suing or charge-offs.  It seems everybody wins and it was  possible because of the self-directed IRA.

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