Suze Orman Money Matters

By now you've heard that the latest economic stimulus package has passed both houses of Congress, and was signed by President Bush this week. If you're in line to get a sizable rebate check in the mail this spring, think twice about doing what the government wants you to do with it.

Stimulating Savings

That's because if you're planning to use your Washington mini-windfall at the mall or a car dealership, you're playing into the government's theory that your spending will stimulate the economy and all will be well. Or at least all will be better.

I don't agree with that approach on any level. The economy isn't floundering because we aren't spending enough; it's floundering because we're spending too much, largely on credit. So do the opposite of what the government is hoping for -- it's far more important for people to boost their savings, not their spending.

Help Yourself First

You read that correctly. The rebate you're about to get should be saved, not spent. It should be used to pay down debt and build up an emergency savings account. What you need to focus on is not what your government wants you to do for the national economy, but what you can do for your personal financial security. Help yourself first.

Does that seem unpatriotic? Please. If you listen to Washington and spend the rebate, and we still slide into a recession and you get laid off, don't count on extended unemployment benefits to help you weather the storm -- that provision didn't make it into the stimulus package, despite Senate Democrats' efforts to include it in an extended bill. You get my point: What Washington wants you to do for the economy isn't necessarily the best thing for your personal security.

The better move is to use your rebate to build your finances. If you've got credit card debt, this is your chance to put a big dent into that unpaid balance. Right now, the stock market is taking us all on a roller coaster ride, but if you pay off a credit card balance that's charging you 18 percent interest you give yourself a guaranteed 18 percent return on your money. Even when stocks are on a bull run, it's hard to get that kind of a return.

Sock It Away

Next up is an emergency cash fund. Seriously, if you haven't paid attention to this advice in the past, pay attention now. A weak economy and a volatile stock market make it all the more important to have some money socked away in a risk-free account.

Of course, with the Fed's 75-basis-point haircut, interest rates on savings accounts are slipping. At the same time, however, banks are so starved for deposits that they're doing all they can to offer strong rates.

If you're convinced rates are going to be coming down even more, consider putting a portion of your savings in a 6- or 12-month CD. You can still find rates north of 4 percent if you act now. Shop for the best deals here.

Make It Work

If you already have an emergency cash fund in place and you don't have credit card debt, you still shouldn't spend the rebate. Invest it for the long term and you can easily increase the value of your rebate five-fold.

For instance, say you're married and have three children; if you meet the income cutoffs, you could be in line for a $2,100 rebate according to the stimulus plan. Invest that $2,100 in a Roth IRA and in 35 years it'll be worth about $34,000, assuming an annualized average 8 percent return.

Is blowing $2,100 today on a plasma-screen TV or a long weekend at Disney World worth the opportunity to add about $34,000 of tax-free money to your retirement stash? I don't think so.

A Jumbo Change

The big news in Washington's stimulus package is that it will sharply increase the dollar limits for what qualifies as a conventional mortgage and what gets tagged as a "jumbo" mortgage.

Right now, mortgages for more than $417,000 are considered to be jumbo loans. The major government agencies that "guarantee" mortgages aren't allowed to touch loans over this threshold. That's had a chilling affect on for mortgages amid the subprime fallout; banks are finding it hard if not impossible to find anyone willing to buy jumbo mortgages in the secondary market. To get investors willing to bite, lenders have raised the rates on jumbos about 1 percentage point above the going rate for a conforming (less-than $417,000) loan. Right now, the national average for a jumbo 30-year fixed-rate is about 6.5 percent, compared to 5.4 percent for a conforming loan.

But jumbos are about to get a lot cheaper: Washington's package includes raising the amounts that qualify as conforming, non-jumbo loans. Fannie Mae and Freddie Mac could see their loan limits for 2008 raised to a maximum of $729,750 in high-cost metro areas; FHA-backed loan limits up to that limit would be permanent. Once the stimulus bill is in effect, plenty of people paying an expensive jumbo will be able to refinance at a lower rate.

But just because you can get a lower rate doesn't mean it'll automatically save you money in the long term.

Refi Rumples

Let me explain. A $600,000, 30-year jumbo mortgage taken out a year ago at 6.4 percent costs $3,753 a month. Let's assume that once the new loan limits kicks in, it can be refinanced into a 5.4 percent mortgage. The monthly tab would be just $3,370, or a monthly difference of $383. That's an annual savings of more than $4,596.

What people never seem to focus on is what will it cost to refinance. First, there's the fact that you may be hit with fees that can easily add up to 2 percent or more of your mortgage amount; even if those costs are rolled into a new mortgage, you're still paying for it -- and paying interest on it, too.

So before you rush to refinance, slow down and think through your plans. If you intend to stay put in the house for a few years, the cost of the refi will eventually be offset by your monthly savings. Use this calculator to find out how long you need to stay in your house for the monthly savings of a refi to offset what you pay in fees. And carefully read the fine print in your existing mortgage to find out if you're going to be hit with a prepayment penalty -- these fees became all too popular during the housing mania. If you're stuck with a prepayment penalty, add the cost of it into your calculation.

Timing Is Everything

The other big refi mistake people make is refinancing into a new 30-year mortgage even though they're already 5, 10, or 20 years into paying off their existing mortgage. Even though you're paying a lower interest rate on the refi, there's a good chance your total interest payments from what you've already paid on the existing loan and what you'll pay on the refi loan will add up to a lot more than if you just stuck with the original mortgage.

Aim to refinance into a mortgage term that will keep your total payment period to 30 years or less. For example, if you've paid off 5 years of your existing mortgage, try to refinance into a 25-year mortgage, not a 30-year one. You can run the numbers using this calculator.