If you tuned into our blog last month, you probably read about our latest series: A Tale of Two Taxpayers. We’re covering how two different taxpayers, those who owe and those who get refunds, can get the most out of their taxes by taking just a few steps throughout the year. Today, we’re gonna talk about how your taxes can help you make an extra mortgage payment.
Is making an extra payment really gonna help?
No matter what side of the coin you landed on, an extra payment will always help. In the long run, you’ll save money on interest and be able to accelerate the principle payments on your home. There are two strategies you can use to make that extra payment: using a budget or your refund.
If you remember one of our earlier posts, we talked about making budgeting a way of life. If you follow the right percentages, between 10-15% a month, you’ll have enough money for an extra payment in no time. That’s where we’ll begin.
Tax-refunders: Don’t throw away your money!
If you got a refund, you’re probably thinking about using your extra cash to make that extra payment. Be careful. Just because you have some extra money in your pocket doesn’t mean it should automatically go toward your mortgage. Think about these things first:
1) Why did you get a refund from the government? In most cases, a refund means you overpaid the feds and didn’t get any interest on that money. Start by adjusting your taxes so you’re not “throwing free money away.”
2) Would diverting the funds to your mortgage help you? If you adjust your tax withholding, your paychecks are going to increase. More money in your pocket means you can check your budget to see if that money would be better spent in savings or going directly toward your mortgage.
3) Choose the best strategy. Each method for paying your extra mortgage payment has a benefit. If you budget your payments throughout the year, you may have more money to put toward your mortgage. By applying your refund to your mortgage payment, you won’t have to save up throughout the year.
No matter what you choose, make the extra payment.
Taxpayers who owe: Maximize your deductions!
If you ended up owing this year, look at your deductions so you can have more for an extra payment. Can you afford to change your withholdings so you can pay fewer taxes? If the answer is yes, let’s look at two options you have:
Option 1: Financing your extra payment with a refund. You can always change your withholdings so you get a refund in April. But don’t be fooled; this might seem like a good idea, however, you may be forfeiting the extra interest. This may not seem like such a bad idea, if you’re thinking about just transferring the money straight toward your mortgage payment.
Option 2: Budgeting in an extra payment. Adjust your tax withholding so you no longer have to make extra tax payments in April. With the leftover money, set up an automatic payment to your savings account so you can make the payment.