Jeff and I have already spent our tax money. We haven't filed or received our refund but the money is spent. We have decided to make extra house payments. I took the amount of money we pay each month to the bank, multiplied it by 12 (months) multiplied it by 30 (years) and found that we are going to pay the bank more than two times the amount we borrowed over the course of our 30 year loan.
That interest is payed up front, meaning in the first few years of your home loan the majority of your monthly payment goes toward the interest and very little goes toward the principle. This is only true if you only pay your mortgage payment and no more. Any extra you pay goes toward the principle.
The less you owe in principle the less you pay in interest. Every dollar I pay extra in principle the first few years of my mortgage is going to save me $1.40 in interest. If I pay $5000 from my tax refund toward my principle it will save me $7000 in Interest. That is $7000 I will not have to pay to my bank, that I will get to keep in my pocket, free money.
A friend of ours is much more experienced in owning homes. She has owned homes for more than 25 years. She currently owns three. She was very distraught at our plan, because don't we know that we can DEDUCT the interest we pay on our house from our income taxes. If we pay off our house no more deduction...
This bothered me a lot because my friend is in essence saying she would rather her hard earned money go to the bank in the form of interest than to the government in the form of taxes. I think this, I don't want the tax man to get my money is a common theme in America. Did you know that banks are incredibly profitable. Look at the Forbes list of the 2000 most profitable companies on the globe, number one and number two are US banks - Citigroup and Bank of America. The interest you pay on your home loan, your credit cards, your car that money goes into the pockets of the richest people on the planet. When you pay out in interest and deduct it from your taxes you are reducing the amount of money paid into the tax pool. Tax money goes to fix roads, fix the roof on the school, clean my drinking water, hire more cops and fireman. Interest you pay to your bank goes to what? Mansions? Lobbyists? Certainly not anything which helps improve the quality of your community.
Reducing the amount of interest you pay via extra house payments, credit card payments or car payments - pay off the principle to reduce your interest is the best bang for your buck. You will generate much more money in your retirement fund, or mad money account by paying less interest than you will by investing.
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I Think I May Have A Screw Loose
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I saw my podiatrist yesterday. One part of my foot is still hurting (it's
been almost two months since the surgery). He thinks it may be one of the
screws ...
14 comments:
Well said!
Do you actually plan on staying in your house for 30 years and do you actually plan on getting 5000 in tax refund?
I disagree with the placement of your money because I believe in the here and now. Once your house is paid off you will be old and not want to have fun with the money you saved.
yes in answer to both questions. i hope to still be having fun in 30 years. our goal is to pay off the house asap.
If you make one extra house payment a year you will have your house paid of in 15 years versus 30. You are correct in what your saying about having that extra money but you have to be sure that your going to save it and use it as you say and no go blow it on things such as apple phones, car stereo's etc. You need to save for the future so that you can have fun later on in life too. Angel has a point about the here and now, but later on she is going to complain about all the money she could have had had she not lived in the moment everytime! LOL I would not worry about paying off that house unless you plan to stay in it for a very long time. You will be investing a lot of money in it and may not get back a huge return for it. Good luck.
As a "real estate professional" there are a few things you should think about before making this decision: (1) Most lenders have stipulations in the Note that you signed that specifically TELL you how much extra you can pay each year before you have to pay a pre-payment penalty (remember, they desperately want that interest); and (2) capital gains taxes will be lobbied on your profit if you ever decide to sell it once you've paid it off, unless you do a 1031 tax exchange and go to a more expensive house (not keep the profit for yourself, in other words). As it stands right now I think a married couple is only allowed up to $500,000 profit from the sale of a property before they have to pay the capital gains tax. Of course, for most normal people in America living in a normal state (i.e. NOT California or the Washington, DC area), there's not much worry about going over a $500,000 profit if you were to sell your house and it was completely paid off.
You hear on HGTV all the time newbie buyers saying, "I'm tired of paying rent, I want to buy a house so I can reap the benefits" -- I'm sure they mean being able to deduct that interest paid to their lender from their income taxes.
For a lot of two-income families, they count on that interest deduction to help offset their income taxes from having two incomes. We haven't gotten a tax refund in 10 years; we always have to pay -- even with the interest deduction! And here we are going into 2008 with no deduction since we technically no longer own a house. Next year's taxes ought to be a downright blast. ::sigh::
I'm not sure why I consider myself a "real estate professional" but I do, so just deal with it.
My house payment is around a thousand dollars per month, at the end of the year that is 12,000 dollars. When we get our house paid off that means every month we don't pay that money, it stays in the bank. At the end of the year no deduction, I pay the IRS a little bit more - I have and extra 12 grand in my pocket. I guess we will see if they give me a 12 grand deduction this year. I would rather have the money go to the irs than to the bank.
One of the best benefits of the military is the VA loan. Not only does the govt guarantee our loan, we don't have to have a down payment, or down payment insurance, we are also guaranteed a low interest rate, a fixed interest rate, and no penalty at all for early payments. Those are important things that not everyone buying a house is wise enough to negotiate into their loan. I guess we are blessed.
My dad told me years ago, and this could have changed, but I believe that there is a one time capital gains exception??? Plus my little house is only worth 150,000. I hope to live here forever and never sell. If we do have to sell, the rest of the world houses cost more, my 150,000 will only be a down payment. LOL.
I do agree with you angel, not to put off living today, but I don't necessarily agree that spending money equals happiness. I am much happier today than I was before I got married, when I spent every cent I had as soon as I had it. I love having financial security and not having to worry. Money worries diminish my ability to enjoy life a lot. I would rather go camping in the back yard, play board games, etc and have that extra money go to the house. We have everything we want, this was just extra found money.
Sorry we don't have to pay a lot of taxes cause they don't pay the military, even a master sgt with 16 years experience, they don't pay us enough to have to pay a lot out in taxes. My hubby keeps forgetting to change his w2 form from being a single person to being married with children so we end up over paying by several thousand every year. We used to go on trips, this year, the house....
Here is a little story I hold dear to my heart. A past co-worker at my job worked until retirement and saved and saved and saved for the time he was to retire so he could use his money for the things he had put off.
One week after he retired he found out he had terminal cancer and died shortly there after.
I don't spend all of my money but I like things and feel if I work I can buy them. Our credit is good and I pay all of my bills so I'm enjoying things now.
We plan on buying a house eventually and since I just bought a new washer and dryer we won't have that headache with the new place.
I did not know you planned on retiring there. If so, then why not buy a brand new house so that in 30 years it won't be really that old? Also, once you start working....don't forget you will have to pay taxes too and like Lorelie said and I know now you don't get any income tax back with two incomes.
Also, what happened to your school? If you going to save that money are you going to finish school?
Don't shoot me with my brutal honesty...that is all it is, my opinion......still love ya!!
To each there own...Do what you think is best with your money and don't listen to the rest of us. Like we know best...which one of us here is the millionaire? Whom ever that is, is the one you should be listening too!
For the record we do pay our taxes, about 28% - although we get a lot of deductions, but the reason we get so much money back when we file is because we overpay every month. If you are having to pay at the end of the year simply modify your w2 form so that you pay more out of each check and you too can have money back at tax time.
I like my 15 year old house, come and visit us, it is the world's best house. I also like the established neighborhood, established schools, big old tree lined streets, etc.
I decided to take a break from school for many reasons, money was a factor but not the only one. Hope I made the right call, but you never know.
This is the only year we are going to put the tax check into the house. As time goes by it makes less of an impact on your interest to make extra payments because they have you pay the interest up front.
Next year we are planning a fun trip to celebrate Mandy's graduation from high school, we are thinking Greece. The following year we are planning a trip to Cancun for our 10 year anniversary. I would rather travel than anything.
I think we are lucky to each of us be married to men who have money values comparable to our own. Imagine if you were married to a saver or if I was married to a spender. We would go crazy.
Greece! Jake may get Bisquitville and that's about it. LOL
I think I may have to take a trip to celebrate Jakes graduation from Kindergarten. If I go by what Angel says I will be to old to be able to travel when Jake graduates from college! Hee hee! That is to get you back Angel for your comment on Marsha's medicine post!
We're on the other end of this situation, as we are retired now in a home we own free and clear, thanks to putting extra on the payments for years. Of course it's possible that we will not live long enough to enjoy the money we have saved, but we have already been able to do some things that I would never have dreamed we could way back when we were young marrieds.
I applaud your thoughtful use of your money, but I would suggest that you change your withholding so you don't get such a huge refund again! You've let Uncle Sam have your money all year long without a penny's interest coming to you!
I'm visiting by way of the BLOG VILLAGE Much Ado about MONEY Carnival!
We have the same system with mortgage payments here in England Marsha. Great advice! I'm finally visiting you from the Blog Village Much Ado About Money Carnival. I had a bad bout of flu and work has been crazy too so I'm a bit behind with things. Better late than never!
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