What to do with tax return?

[ua_guy]

Our tax return is shaping up to be big this year, probably just shy of $10k. Most of it is from mortgage interest deductions. I'm a bit conflicted about what to do with the money. Maybe you can help provide constructive feedback? Feel free to ask clarifying questions or additional information.

Option 1: Lump-sum mortgage payment. Interest rate = 3.5% We do carry PMI, I'm not proud of it, and the sooner we get to 80% LTV, the better.

Option 2: Contribute to IRA. We already make maximum contributions to our other 401k/403b retirement accounts but have not made IRA contributions.

Option 3: Pay down vehicle debt. We finance 2 vehicles, both at 1.99%. Nothing notable about the vehicles, both have positive equity, one was purchased new on a 60 month term, the other was a certified used model with 15k miles and was put on a 48. Problem is, both vehicles see a lot of miles (20k+/year) so I want to get them paid for, before they get too old.

Option 4: Augment EF savings. We currently have a little more than 4 months expenses saved and it's growing.

We have no other debts, no other loans, and no children.

[Goldy]

How much does the pmi cost each month and how much cash would it take to get down to 20% equity?

Depending on the answers to the pmi question I would probably open a Roth since 1.99% wouldn't bother me much.

[ua_guy]

~$570/month is what PMI amounts to.

I think throwing the refund at the mortgage makes good sense, but I haven't quite figured out how it could get us ahead with PMI just yet. Right now, we'd need 100k to meet 80% LTV, but with regular payments we're making almost $900 headway every month and that goes up per the amortization schedule, and we put 5% down. The goal would be to remove PMI before it falls off in 5 years, so it would be a close race and would require additional cash at the mortgage each month.

[Goldy]

Wow, that's a lot more than I thought it would be. I agree with you to throw it at the mortgage.

[MoneyTips4U]

Hi there. The mortgage sounds like a good idea.

Also, have you thought about changing your tax information to make it more accurate?

When you get a tax refund that large, you are letting the government hold your money throughout the year when in reality you should be getting most of that in your paycheck. The government doesn't pay interest on that money. You are letting them hold onto interest-free money.

You could be using that money. That money could be working for you. That money could be paying off a mortgage which in turn reduces the amount of interest you need to pay which in turn saves you money.

[riverwed070707]

~$570/month is what PMI amounts to.

I think throwing the refund at the mortgage makes good sense, but I haven't quite figured out how it could get us ahead with PMI just yet. Right now, we'd need 100k to meet 80% LTV, but with regular payments we're making almost $900 headway every month and that goes up per the amortization schedule, and we put 5% down. The goal would be to remove PMI before it falls off in 5 years, so it would be a close race and would require additional cash at the mortgage each month.

$570 a MONTH?? Not per year?? How big is your mortagage payment? I feel like you're accounting for your entire escrow payment here, not your PMI. Your home would have to be $1M+ to have PMI that high and I'm not sure they do mortgages at more than 80% for that much home.

[Goldy]

Nevermind

[ua_guy]

The original loan amount was 537k, FHA at 3.500%.

[HappySaver]

According to Investopedia, PMI "typically costs between .5% and 1% of the entire loan amount on an annual basis".

Wow, I had no idea PMI was quite that much, even though everyone always talks about how expensive it is!

At 1% on a $537,000 loan, that comes to $447.50 per month. So you're above average cost, but in the ballpark.

Are you saying your PMI falls off in 5 years whether you've reached 80% LTV or not? Are you sure (no gotchas in the fine print)?

If that's true, unless you realistically expect to put additional other (non-tax refund) money towards the mortgage I think you may be better off building your EF to where it should be.

Otherwise I agree with putting the refund entirely towards the mortgage - that alone would save you close to one year of PMI payments. If you get in habit of always putting the extra tax money towards the mortgage you'll get there significantly faster (I agree with fixing your exemptions so you get more throughout the year).

[JoeP]

Our tax return is shaping up to be big this year, probably just shy of $10k. Most of it is from mortgage interest deductions. I'm a bit conflicted about what to do with the money. Maybe you can help provide constructive feedback? Feel free to ask clarifying questions or additional information.

Option 1: Lump-sum mortgage payment. Interest rate = 3.5% We do carry PMI, I'm not proud of it, and the sooner we get to 80% LTV, the better.

Option 2: Contribute to IRA. We already make maximum contributions to our other 401k/403b retirement accounts but have not made IRA contributions.

Option 3: Pay down vehicle debt. We finance 2 vehicles, both at 1.99%. Nothing notable about the vehicles, both have positive equity, one was purchased new on a 60 month term, the other was a certified used model with 15k miles and was put on a 48. Problem is, both vehicles see a lot of miles (20k+/year) so I want to get them paid for, before they get too old.

Option 4: Augment EF savings. We currently have a little more than 4 months expenses saved and it's growing.

We have no other debts, no other loans, and no children.

We're getting back much less (around 1900) and will be putting it into our EF. In fact, our refunds get automatically deposited there, so there is no effort on our part. We have about the same amount in there duration-wise as you, and we would feel much better getting that out to the 8 month mark.

[Eagle]

Wow, that's a lot more than I thought it would be. I agree with you to throw it at the mortgage.

I agree as well. Put that tax return towards your mortgage.