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Your debt, credit, housing questions answered

TODAY’s financial editor Jean Chatzky, CNBC personal finance correspondent Sharon Epperson and CNBC’s On the Money anchor Carmen Wong Ulrich offer viewers financial advice.
/ Source: TODAY

TODAY’s financial editor Jean Chatzky, CNBC personal finance correspondent Sharon Epperson and CNBC’s On the Money anchor Carmen Wong Ulrich offer viewers financial advice.

Q: I have recently quit my job to stay home with my new baby. (Child care costs are too high compared with what my income was.) I have a 401(k) and need to know what to do with it now. Should I roll it into an IRA? I have about $3,000 in it and I am 25 years old. Thanks! -Jennifer, Maryville, Tenn.

Jean Chatzky: Jennifer, you should absolutely roll over your 401(k) into an IRA. As a nonworking spouse, you're also eligible to continue making contributions to that IRA, up to $5,000 in 2009, as long as you and your husband file your taxes jointly.

I'd also consider converting that traditional IRA into a Roth IRA. You have to pay income taxes on the balance when you convert, but chances are good that your 401(k)'s value took a hit over the last year or so. That means you'll be paying on a smaller amount of money, and the money you continue to invest in the Roth will grow tax-free. The expectation is that income taxes are going to go up in the near future, which means you're better off paying taxes on the money now. Converting from a traditional IRA to a Roth IRA typically requires you and your spouse to have a modified adjusted gross income of less than $100,000, but beginning in 2010, that income limit goes away.

Q: Five years ago I purchased my first home. Last year I got married. This year my husband and I plan to sell this house and build our next home together. Since that will be his first time buying a home, will we qualify for the $8,000 first-time homeowners tax credit? -Princess & Jonathan, Oklahoma City, Okla.

Sharon Epperson: Unfortunately, the IRS says "No." The purchase date determines whether you and your spouse are first-time homebuyers — so neither of you qualify. You've owned a principal residence for five years. The tax code requires that the taxpayer or the taxpayer's spouse not have an ownership interest in a principal residence within the prior three years from the date of purchase. The IRS says your husband can't take the credit even if he filed on a separate return. Sorry.

For others who are considering building their first home, you'll need to act fast to claim this credit. First of all there are income limits — $95,000 if you're single or $170,000 if you're married. Also, when it comes to new construction, you have to have moved into the home to qualify for the first-time homebuyer's credit. The date the homebuyer takes occupancy of the house is considered the purchase date, not when the sales contract is signed. Homebuyers may qualify for the tax credit if they purchase the home on or after Jan. 1 but before Dec. 1, 2009 — so you have to have moved in by November 30. Since it can take four to six months at least to build a house from scratch, you'll need to hurry to make the deadline.

Q: My husband is a chiropractor who recently closed his business. He has a personally guaranteed SBA loan at 5.7 percent interest. He still owes $140,000 and there are seven years left on the term. He has almost no assets that the bank could liquidate should he default on the loan. Does it make more sense for us to continue to make the monthly payments of $2,050 for the next seven years or does it make more sense for him to file personal bankruptcy, and does an SBA loan qualify for personal bankruptcy? -Dina, Fairfax, Va.

Jean Chatzky: The first thing your husband should do is talk to his banker about the possibility of restructuring the loan. They may extend the life of the loan to lower the payments. He'll accrue more interest, but it will also give him an opportunity to pay off the loan with future earnings and help him avoid bankruptcy.

If that doesn't work, and he decides to file bankruptcy — which is always, always a last resort — the SBA loan will be treated just like any other bank loan, meaning that the lender will stand in line with other creditors when your husband's assets — however few — are divided among his unsecured creditors. If your husband gave a personal guarantee based on your home when the loan was made, the lender has a secured claim on your home. That means if he files Chapter 7 bankruptcy, there is a possibility that you could lose your home.

One final thing to keep in mind: If there is a loss to the government on this loan — meaning if your husband ends up not paying it back — he won't be eligible for any future SBA loans. So if he plans to open another business, that's something to think about.

Q: We keep hearing stories about help for homeowners from the government and from the stimulus package in order to avoid foreclosures, however, in our neighborhood, where home prices have dropped dramatically, there is no help. Not one person in our neighborhood has been able to restructure their existing loans since we all owe more than our homes are worth. (We owe roughly $200,000 more than our home is worth.) The banks won't even talk to us since we are still making our payments. We are not asking for our debt to be forgiven — we purchased our house and are responsible, we just want the bank to restructure our loan before the rate jumps up and we can't afford it. Is there any help for us while we are still in good standing, or do we have to be in trouble of foreclosure before any banks will help us? Why won't the banks help us like we've been promised? -Sarah, Turlock, Calif.

Sharon Epperson: There are many borrowers like this in California, Nevada, Arizona and Florida, states that have led the nation in foreclosure. These borrowers are seriously upside-down in the mortgage — they owe much more than the home is worth — yet they're unable to refinance. Why? They don't qualify for refinancing under the Making Home Affordable Plan because they're well over the 105 percent Loan To Value ratio on their home that's needed to qualify. They don't qualify for loan modification because they are not in a financial hardship. It's a glaring omission in the Obama administration's housing plan. And that seems to be your predicament — but go through the checklist on the MakingHomeAffordable.gov Web site to make sure. You may also want to check in with a housing counselor through the Hope Now Alliance at www.hopenow.com or call the 24-hour hot line at 888-995-HOPE.

Q: I have been doing everything right — I have been maxing out my 401(k) and Roth IRA since the age of 21.  I am 37 now and understand that because these are not FDIC insured I can potentially lose everything, is that correct? Should I just stop investing now and put my money in a safe CD? I feel like my 15+ years of investing have gotten me nowhere. Also, I have a 15-month-old — should I purchase I-Bond's municipal bonds for him? I'm very confused. -Angela B. Schaumburg, Ill.

Carmen Wong Ulrich: Angela, you are right that outside of bank deposits that you may have in the 401(k) and Roth, say, a money market account, you do not have FDIC insurance. However, that doesn't mean that should your employer go under, you'd lose your investments! Your 401(k) is held by a third party outside of your employer's funds. Of course stock holdings are subject to market fluctuations, and that's where the risk is.

Your holdings are backed, however, by SIPC (Securities Investor Protection Corp) — should something happen to the company that holds your 401(k) and/or Roth IRA, your holdings remain the same. If another company buys that company, for example, and they take over your account, if any of your holdings are lost in the transition, then SIPC insurance steps in to cover you up to $500k. As for your 15-month-old, if this is for college, start up a 529 — or Coverdell ESA (Education Savings Account). You can invest within either, or hold the money in money markets (cash equivalent), but the key here is that you enjoy tax-free growth — consider them IRAs for college. These too are protected by SIPC — don't worry!

Q: I am a stay-at-home mom of three and my husband is in midlevel management at a production facility. We have saved up enough money to have a 9- to 10-month safety net of mortgage payments in the bank. My question is this ... we need to replace our entire HVAC system (furnace and A/C) and now seems to be the best time with rebates, stimulus package, etc. Are we better taking money out of the bank (our safety net) or putting it on our credit card (very little on it now) and paying it off as much as we can each month? -Shari, Madison, Wis.

Sharon Epperson: This is a big-ticket purchase — let's say roughly $3,000 to $6,000 for a brand new HVAC system — so you're smart to consider the opportunity cost of taking that much money from your safety net, even if you'll get a decent tax credit for buying a more energy-efficient system. How many months' worth of savings for household expenses (not just the mortgage) will you have left if you buy this system? If it's less than six months, I would hold off on making the purchase until you can afford to buy the HVAC system AND have six months of cash for expenses in the bank. Ideally you should have nine months in the bank, since your husband is the sole breadwinner.

If you really need to make this improvement now and have a zero-interest credit card, I might consider putting the purchase on that card and paying off the balance in six monthly installments (or whatever the time frame is until an interest rate kicks in). If you don't have a zero-interest card, I think you should just pay for the HVAC system — as long as you'll have six to nine months' worth of savings left over.

Keep in mind: The tax credits in the stimulus package that are available for energy-efficient improvements are only for qualified products. To find the qualified central air and heating pump systems, go to the Consortium for Energy Efficiency product directory at www.ceedirectory.org. If you have a natural gas or oil furnace and boiler, check out qualifying products at the Air Conditioning, Heating and Refrigeration Institute's Web site at www.ahrinet.org. 

You may be able to claim tax credits equal to 30 percent of the installed costs for the equipment and labor on qualified products, up to a total of $1,500. The new tax credits are retroactive to Jan. 1, 2009, and expire on Dec. 31, 2010. The $1,500 limit is for all improvements made during the two-year term, not $1,500 each year.

Q: You've said it is not good for your credit score to cancel a credit card even if you aren't using it, and to use it once a month to keep it active. Is this true even if the card has an annual fee attached? And does it hurt your score if you do not use the card, but keep it open? I have a lot of retail cards that I no longer want to use, and I'd rather use one major card for all purchases. -Linda, Pittsburgh, Pa.

Jean Chatzky: I tend to say that if the card has an annual fee attached, and you're not using it, you're wasting money and you can go ahead and cancel it. But these are different times, and you really need to consider the impact that will have on your score. If that card has a high credit limit, and you've had it in your wallet for a considerable length of time, canceling it could really ding your credit score, which could end up costing you a lot more than that annual fee in the way of higher interest rates on any money you plan to borrow in the future. If you don't plan to borrow any money in the next year or so, you can cancel the card, but be sure to keep your nose clean in every other area — pay your bills on time, keep your debt levels low — and know that your score will take a hit for a little while.

And no, it doesn't hurt your score to have an open card and not use it, but you run the risk of the lender canceling the card for inactivity, particularly in this economy. That's why I suggest using cards every once in a while for small purchases that you can pay off right away.

Q: My husband and I own two homes, which means we have two mortgages. We purchased a house in 2004. After two years we purchased another home. Once we moved in 2006, we tried to sell our first house for a year and it would not sell, so we decided to rent it. Our renters have moved out and we are trying to sell it again. We are trying to decide whether to keep it on the market or to rent it again. Any advice would be greatly appreciated. -Heather, Lakeland, Fla.

Sharon Epperson: Heather, you have a lot of factors to consider and fewer options since your Tampa home is investment property — though it doesn't sound like you intended for it to be one.

Foreclosures continue to weigh on home prices in Florida, California, Nevada and Arizona. On average, Florida home prices were down 30 percent in March 2009 compared to March 2008. In Tampa, the median home price fell 24 percent last month versus a year ago, according to the Florida Association of Realtors. Some economists expect home prices to stabilize by the end of the year in most parts of the country, but local realtors I talked to in Tampa are more skeptical. If you're underwater on the mortgage on that home and homes price go back to appreciating 3 to 5 percent a year like the historical average, it could take years for you to recoup those losses. That said, if you want to sell now, there are signs that buyers are looking for bargains. 

The good news is lower prices and government incentives like the first-time homebuyers credit have driven up sales — realtor sales increased 16 percent in Tampa in March. The bad news for sellers and landlords is that the number of foreclosures and vacant properties has driven down the price that you can command. You may have to take a loss if you sell. Even if you rent the home, it may not cover the mortgage, taxes and insurance. Having a tenant who pays on time is great, but you still may have to dig into your pocket to cover the cost of that home if the rent doesn't.

If you have a tenant who can cover the rent, that buys you a lot of valuable time. Wait for a few months to see if home prices really have stabilized.

Q: Two of my husband's credit card companies raised their rates dramatically. They will let him "opt out" of the raised rates by closing the accounts and paying off the balances at the previous rate. Will this adversely affect his credit rating? -Laura, Westbrook, Maine

Sharon Epperson: Yes, unfortunately, if you choose the lower interest rate, you get hit on your credit report as they will close the card. Very much a bad choice for many consumers — it's as if you're choosing between paying more out of pocket now to protect your credit vs. paying less now only to get hit with a lower credit score and potentially costlier debts down the road. Part of deciding this one is how high your balance is. If you're unable to pay this card off in the next six months or so, and we're looking at 25 to 29 percent interest rates, paying that much in interest may be more of a financial strain on you than taking a lower rate, say 7 percent, over a long period of time and swallowing the credit-score hit, which will lose its power over time.

Q: My dad just passed away and my mom is left with some credit debt. What happens to the credit card debt that was just his? Does she have to pay his cards? -Jannae, Delano, Calif.

Jean Chatzky: This depends largely on your state. In many community property states — and California is a community property state — the debts would be passed to your mother if they were incurred during the marriage. If you have questions about this, you can contact a consumer law attorney. In most instances, however, if the cards were in his name and his name only, your father's estate is responsible for paying the debt off. Once they are taken care of, the remainder of the estate will be divvied up as dictated in your father's will, if he had one, or probate, if he didn't. If there aren't enough assets to pay for the debt, the estate will be considered insolvent and his creditors will be notified accordingly. The debt will be forgiven.

As for any cards or debts that are joint accounts between your mother and your father — in other words, your mother was on the account as a co-signer — she'll likely be responsible for paying that debt off, with the help of your father's estate.