March 17, 2009 -- "Good Morning America" financial contributor Mellody Hobson is answering your economic questions. Check out her advice below.
Mind-body medicine expert Deepak Chopra is on the Hot Seat Wednesday. Click here to ask him a question.
Mellody, it looks like we will have a decent tax refund. Should we put it aside for upcoming college tuition or pay down credit card debt?
If those are your two choices then you should definitely pay down your credit card debt first. Getting yourself out of credit card debt will allow you to avoid high interest charges associated with late payments. The interest rate on credit cards averages 15 percent, which is higher than the interest rates on student loans, which average around 5 percent to 9 percent. So, whatever has a higher rate in your case, you should pay off that one first.
With the declined housing values, is it better now to build savings rather than pay down a mortgage if you have a low interest rate?
First you want to pay off any high interest debt like credit cards. Second, if you do not have an emergency fund of three to six months, you want to take care of that next, and build your savings for that specific reason. Then if you want to attack your mortgage you should do so. You will save thousands of dollars in interest.
Is it a good time to refinance your home?
Right now may be an excellent time to refinance your home, especially with 30-year mortgage rates hovering just above 5 percent. However, you should make sure that you are saving more than what the refinancing process will cost you.
There is a simple calculation. Take the total amount of your refinancing costs and divide it by what the monthly savings that will result from the lower mortgage rate, and that will tell you how many months it will take you before you can enjoy the savings from your refinance.
For example, if your refinance costs are $2,000, and your monthly savings from the refinance is $100, then it will take 20 months to break even. So if you plan to own your current home more than 20 months, then it is worth it.
Keep in mind that it is still very hard to get a mortgage because of the credit crunch.
I retired and then the stock market plunged. I have not touched my investment. Am I doing the right thing to expect it to recover over a possible 5-10 year period? I can't afford to add to it at this point.
Let's say that you were unlucky enough to have invested all your money at the worst possible time. That would mean you bought in early October 2007; the S&P 500 index has fallen nearly 52 percent since then. If we have found a bottom — and nobody knows whether we have — then it would take just over seven years for you to recover fully if the market returned 10 percent annually, which is near its historical norm.
Even if we have subpar returns of 7 percent annually, you would have recovered fully in just over 10 years. But coming out of a trough, returns are often above average. If the market gains 12 percent annually, you'll be even after just over six years.
So I think the answer to your questions is that you're unlikely to recover fully within five years, but quite likely to do so in 10 years. Again, all this depends upon when you invested.
I keep hearing that part of the stimulus package will be used to reimburse people 65 percent of the cost for COBRA health benefit continuation. However, everywhere I look I can't find any details about when or how this is going to take effect. Can you give me any "helpful" information on taking advantage of this. Thank you.
The new stimulus package does contain a provision whereby COBRA coverage will now be subsidized by 65 percent. The COBRA subsidy goes into effect March 1, 2009, and it covers 65 percent of a worker's COBRA premiums for up to nine months.
Given that COBRA costs an average of $390 a month for individuals and $1,280 for families, this is an important benefit and will enable many people to maintain their coverage. For individuals, the cost will be lowered to an average of $140 a month and for families, it will go down to about $450 a month. This COBRA subsidy is limited to workers who were laid off between Sept. 1, 2008, and Dec. 31, 2009.
Employers are required by law to send a notice no later than April 18, 2009, to all eligible individuals giving them a second opportunity to elect COBRA coverage. If you have been paying for COBRA since September 2008, the subsidy will not apply to your previous payments, only those made after Feb. 18.