Financial Q&A: comparing the safest investments

Submit your questions to Steve Dinnen at: money@csmonitor.com

Q: What is the difference in finding safety in Treasury Bills versus FDIC-insured Certificates of Deposit? Most CDs have yields of 2 to 3 percent; the other is less than 1 percent.

H.E., via e-mail

A: Both CDs and Treasury Bills are among the safest investments you can make. A Certificate of Deposit is an agreement with a lending institution that is insured by a government agency, while a T-Bill's repayment is guaranteed by the federal government.

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Those are just slight differences. Rich Arzaga, a wealth-planning adviser in San Ramon, Calif., says there are bigger differences, such as:

•Insurance risk. That government insurance from the FDIC is generally limited to $250,000 at a single institution. There's no such cap with T-bills.

•Duration. A T-Bill is short term; no more than 52 weeks. CDs can stretch for years, if you wish.

•Taxes. Interest paid on CDs is fully taxable. Interest on T-Bills is free of state and local income taxes, which can make a difference if you live in a state with a high tax rate.

Mr. Arzaga says a better question might be whether cash is the most suitable asset class for the long term.

He thinks a good, safe alternative might be with Treasury Inflation-Protected Securities (TIPS). They have the same tax status as the T-Bill, and the inflation protection that CDs and T-Bills lack. They can be bought directly from the US government on its website (treasurydirect.gov).

Q: We have 24.5 years left on our 30-year fixed-rate mortgage. If we refinance, the monthly principal and interest would be about $10 less per month, but this would be on a 20-year, fixed-rate loan. We would eliminate more than 50 months of payments (about $450 in monthly principal and interest), totaling more $20,000. It seems the $1,000 to $3,000 in costs to refinance would be worth it. Or, am I missing something?

K.R.P., via e-mail

A: If you simply look at whether you'd be better off than you are now, you'll obviously improve your situation by refinancing, says Ray Benton, a certified financial planner in Denver.

But does the improvement justify the cost?

By viewing the changes to your cash flow, the answer is in favor of the refinance. If you stay in the house long enough to enjoy the projected savings, the net present value is about $25,000.

But Mr. Benton advises you to wait a few months. That's because Mark Zandi at Economy.com expects mortgage rates to drop to 4.5 percent by late spring or early summer. And look at refinancing with a 30-year fixed-rate mortgage. You may be able make more or less the same payments (a 20-year amortization), while retaining more flexibility if you run into difficulties or decide to sell the house sooner than expected.

You might check with your lender to see how low it's willing to go on refinancing costs. There's a lot of difference between $1,000 and $3,000, and the lower the cost, the quicker the payback to you.

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