Our Tax Refund Gameplan

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by Elle · 15 comments

I mentioned earlier some ideas for tax refunds that we’ve used to improve our finances. What’s our plan for our tax refund this year? We just have two goals this year: pay down the mortgage and paying cash for some small house projects.

Paying Down the Mortgage

Our main goal this year with the refund is to go ahead, take the first time home buyer’s tax credit, and put it towards paying down our mortgage. We want to put the $8,000 tax credit and take some years off our mortgage.  In addition to using the tax refund, we’re also automating an additional $150/month towards our mortgage principle.

Why Pay the Mortgage Down?

By paying our mortgage earlier than the 30 years scheduled, we’re going to save tens of thousands of dollars in interest. Following the mortgage amoritization schedule, most of the money go towards paying interest in the beginning of your loan. As the mortgages draw to a close, the payments increasingly towards the principle owed.

Notice how little of our first year's payments are going towards principle.

Notice how little of our first year’s payments are going towards principle.

It’s also more about peace of mind. We’re hoping to eventually improve our monthly cash flow by eliminating our mortgage earlier than scheduled.

How to Accelerate Mortgage Payoff

It’s not too difficult to pay extra on your mortgage, just check with your lender to see what’s the best method.

The easiest way is to add the additional money to your regular mortgage payments. Make sure you indicate that the extra money to go towards principle; otherwise your lender could consider it as an early payment for the next month or so, and won’t apply it to your principal balance.

Your Thoughts on Your Tax Returns

How about you? If you’re getting a tax return, how are you using it?

About Elle
Elle helps families at Couple Money achieve financial freedom by sharing tips for reducing debt, increase income, and building net worth. Learn how to live on one income and have fun with the second..

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  • http://deliverawaydebt.com Jeff

    I like the idea. It’s so much better to use the tax return for good rather than evil (spending). I’m using mine to continue to pay down my debt. The debt I’m working on now is the 2nd mortgage (don’t ever get one by the way).

    Good luck with the plan.

  • http://www.moneymakingsense.com Ken

    We are going to re-fund our emergency fund…had to tap it several times this past 2 months…we are then going to put some money away for Christmas…then pay down debt with the rest….maybe buy some much needed blinds if there is enough coming back.

  • Elle

    @Jeff: Our original plan was to put the $8k with our down payment (we were told we could do that, but couldn’t find someone who would), so this is the next best option.

    @Ken: While I’m sad you’ve had some financial hiccups lately, I’m glad you had an emergency fund to help you out. We’re buffing up our emergency fund up too with my temporary 2nd job.

  • http://www.financialsamurai.com Financial Samurai

    Good stuff that you’re already thinking of paying down the mortgage! One of the things I like doing is once a year, pay down the mortgage by the total amount just in principal. You can barely feel the money going out of your pocket if you do it right, and of course, you save so much in the future.

    Have you got all your furniture and stuff already?

  • http://steadfastfinances.com Matt SF

    Nice work! Depending on the interest rate and the length of your mortgage, it will take somewhere between half to two-thirds the of the lifetime of your mortgage for the principal to overtake the interest paid. Assuming, of course, you’re just paying minimum payments alone, so paying extra will really help you over the long term.

  • http://www.moneyreasons.com Money Reasons

    This month (tomorrow actually) will be my last mortgage payment (hurray!)

    We ended up paying our mortgage off in a little over 10 years. I think it’s one of the wisest financial moves I’ve ever made, especially given what the “Great Recession” that we just went through (and hopefully are coming out of).

    Putting that extra $8,000 towards mortgage principal should have a major impact to length of your mortgage (as I’m sure you well know…)! Just curious are you currently paying PMI insurance?

    We made spreadsheet too, and that made it all believable and possible! Great way to go. I also made a “what if” spreadsheet so I knew what would happen if I made extra principal payments.

    For me, the next big hurdle is figuring out what investment vehicle to put the extra money in! Most likely, I’ll go with a very diversified approach!

    Hmmm, what would I do today. Well the mortgage rates are ridiculously low, so I’m not sure I’d be as quick to pay off the mortgage. My problem was I doubt that we were disiplined enough to sock the extra money into investments (other than my 401(k), which is automated…)! If you have that disipline, it’s something to consider these days.

    If you can’t make up your mind, split it down the middle! Half goes towards mortgage payments and half to investments!

    Either choice is a win-win, good deal for you!

  • Elle

    @FS: All the furniture except some chairs are now in the new place. I’m setting up my home office this week (blogging from dining room table right now-very classy!).

    @Matt SF: I know; cutting some time and saving on interest is a great motivator! We’re setting up the extra payments to start with our 1st mortgage payment next month.

    @Money Reasons: Congrats on being mortgage free! Paying down the mortgage is both a personal and finance issue with us. We’ll continue to invest, but paying down the mortgage early is a mutual goal for us. I like your 50/50 advice and as we move along with life, we may revisit the issue. Hope you celebrate the big victory!

  • http://evolutionofwealth.com Evolution Of Wealth

    I wrote a post titled “Your Mortgage: When 30 beats 15” Most people underestimate or don’t even account for the time value of money when they are making decisions regarding their mortgage. The fact of the matter is that it is not a stand alone decision. The rest of your financial situation must be taken into account in order to put you in the best position.

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  • Elle

    @EofW: I agree that you have to look at the big picture when making a decision about your family’s finances. We chose the 30 year option to give us some wiggle room should the need arise, but we’re setting it up to have extra payments made on a monthly basis.

  • http://www.youngandthrifty.ca youngandthrifty

    @Money Reasons- congrats on being mortgage free- wow 10 years to pay it down- that’s great!!

    I am mortgage free too, but only because I don’t have one!! =( *yet* am working on it.

    That’s a good idea to use your tax refund to pay the debt down. It’s so tempting to just splurge it, so kudos to you for resisting the temptation. =)

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