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MONEY TALK / CARLA LAZZARESCHI

How to Get Your 'T Plus 3' Quickly

October 08, 1995|CARLA LAZZARESCHI

Q: According to the new rules for settlement of stock and bond transactions, the so-called "T plus 3," I have to pay my broker for my purchases within three days of purchase. However, when I sell securities, the check is mailed to me and arrives five to eight days after the settlement date. Is there anything I can do to get my money within the three days? -- B.F.R .

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A: Here's how Charles Schwab, the nation's largest discount brokerage, administers the "T plus 3" rules, which went into effect earlier this year.

Buyers have until the close of business on the third day following their purchase to get their funds to the brokerage. So, if you purchased shares on Monday, you would have until the close of business on Thursday to make payment.

Sales are handled differently, depending on whether the funds are to be mailed via check or deposited into the customer's cash account at the brokerage. If the funds are to deposited into the account, they are credited on the morning of the third day following the transaction; customers can draw on those funds any time during the day. You may even get a check for the amount from Schwab the morning of the third day, but you will have to go directly to your branch office to request and pick it up. If you want your funds mailed to you, a check will not be cut until the end of business on the third day following the transaction. Then it will spend at least another day or two in the postal system before arriving on your door step.

In sum, the only way you can receive the proceeds of your sales transaction as quickly as you must pay for your purchase is to go directly to your broker's branch office and pick up your check.

The Lowdown on New vs. Convertible Loans

Q: I have an adjustable-rate mortgage that can convert to a fixed-rate mortgage at a prevailing interest rate plus $450. However, the conversion rate that the lender quotes is always considerably higher than the rate it charges on new fixed-rate loans. How can this be? -- W.J.R .

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A: Because you failed to provide the name of your mortgage holder, we took your question to the Bank of America, the state's largest, for an explanation. Here's what executives there said:

Generally speaking, the fixed rate quoted for convertible loans is tied to an index of Federal National Mortgage Assn. (Fannie Mae) loans, while newly originating fixed-rate mortgages are set according to other factors. At the B of A, the loan rate quoted for adjustable to fixed conversions of conforming loans is five-eights of a point higher than the posted 60-day Fannie Mae rate; jumbo loans carry a rate 1.25 percentage points higher than the posted 60-day Fannie Mae rate. Meanwhile, rates for newly originating fixed-rate loans are set by a variety of factors, including prevailing market conditions, consumer demand for loans, and competition among lenders.

According to B of A representatives, there are several reasons why convertible loans are treated differently from new loans, and why you generally have to pay a higher rate of interest on a convertible loan than a new one. For starters, the secondary market for "already converted" convertible loans is not large, so lenders have to price them higher to attract buyers. In addition, buyers of notes on the secondary market price their purchases based on the expected life of a loan. Most loans are repaid within 10 years, generally because the house is sold.

However, it is generally believed that converted loans, because they have already been running for a few years, carry a shorter life span. Again, this is viewed as a reason to offer the secondary buyer the incentive of a higher rate of return.

Facts to Ponder When Giving Away a House

Q: My wife and I are renting a home to our daughter and her husband. Now we would like to give it to them. The house is worth about $300,000 and the mortgage is $120,000. Can we give it to them in pieces of $40,000 per year, that is, $10,000 from each of us to each of them? And what amount are we giving away, the $300,000 or $180,000? --L.B .

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A: You can give the house away in pieces of $40,000 per year, and the amount you are giving is your $180,000 equity. Your daughter and her husband would then be responsible for getting their own mortgage. However, you should consider other aspects to your plan.

According to Alex Fried, an Encino estate planning lawyer, you could have a gain for income tax purposes if the amount of the debt you are relieved of, about $120,000, is greater than your tax basis in the house. If your basis is larger, then this is not an issue.

Fried adds that if you give away a percentage ownership in an asset over several years, you should have the asset reappraised each year. Also, you may need professional assistance in determining how to assign value to the fractional interests you give each year.

For example, the $40,000 you give in the first year is about 22% of your total equity. However, experts say the initial gifts, because they offer the recipients only a small ownership stake in the asset, should be discounted by perhaps as much as 20% or 25%. Subsequent gifts of $40,000 would carry greater weight, especially as the recipients' ownership approached 100%.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles 90053.

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