June Mortgage update: and what we did with a big tax refund

Last month (May):

Balance: $126,271.80
Years left: 11.25
P = $707.05, I =$507.35, Escrow = 591.95

This month (June):

Balance: $120,363.57
Years left: 10.5833333
P = $714.58, I =$499.83, Escrow = 591.95

One month’s savings (difference in amount going to interest rather than principal next month): $20.56. Not bad!

So we got our gigantic tax refund. Yes, I know we’re not supposed to get a huge tax refund, but our taxes were very complicated this year so we overestimated our estimated payments (or rather, we knew we should send in less, but not how much less, and we didn’t want a penalty). Since we weren’t expecting it and we’re already on track for summer money, it doesn’t need to spend the summer in savings at 0.55%.

What to do with a gigantic tax refund you’re not expecting (and thus, have not already spent)?

I asked #2. Here’s her response:
#2: So… tapir massage is a thing?
#1: I don’t think I want a tapir massage.
I could put the money in a retirement account…
#2: No, no, YOU massage the tapir!
#1: I don’t want to do that either
nor do I want to donate to the fund for unmassaged Tapirs

So that’s out.

Her next suggestion was to pre-pay the mortgage with some and buy lots of books… but I don’t really want to buy any more books until either the next Parasol Protectorate comes out or I make at least a teeny dent in the books I really want to read and already own.

I narrowed it down to three options.
1. Mortgage prepayment
2. Tax advantaged savings
3. Non-tax advantaged accounts

Mortgage prepayment is the easiest of the three and well suited to my laziness. It’s also still giving a relatively good return on a safe investment. Our interest rate is 4.75 with the effective rate (adjusted for taxes) lower than that, but still higher than our savings account. However, the stock market seems to have settled down some and we could still be funneling another 33K into tax advantaged retirement accounts. It might make more sense to put money there. Money paid towards the mortgage is also difficult to take out, either with a higher interest rate HEL or by selling the house.

Tax-advantaged savings would be my first choice if we qualified for Roth IRAs or were sure we’d be able to get tax savings on a traditional IRA. Since our income is often right near the phase-out, it would be safer to start funneling money into the state 457 (which is similar to a 401(k) but has slightly different rules), because we would be sure to get the tax deduction. We’re already maxing out our 403(b). However there are start-up costs to the 457 and I’m not actually sure that we could contribute a lump-sum, or how etc. and that would take research. Of course it is research we would only have to do once, but meh. Another problem is that it’s a bit harder to tap this money without penalty, though a 457 is easier/less expensive to liquidate than a 403(b) in cases of lost employment.

Non-tax-advantaged accounts are also appealing. If I didn’t have a years expenses in them right now, I might start there. It is nice knowing that in case of emergency this is another place we could tap and that one day we’ll have enough money in them to have a nice income stream from dividends. But, when we have a healthy second-tier emergency fund already, it seems silly to bypass tax advantaged savings or a guaranteed return interest rate in the form of the mortgage.

Which did I choose? As always, I satisficed and took the lazy way out. Hence this month’s mortgage update.  (We also bought some furniture that we probably should have bought 4 years ago…)  Next September though, I am going to think really hard about if we want to keep funneling money into the mortgage or if we want to start focusing our extra funds on the 457 plans instead with regular paycheck deductions, especially since our employer matching is being cut next year (and health insurance costs are rising etc.). These real wage paycuts are killing me! We want raises!

So, what do you think? Was the mortgage the right decision?

26 Responses to “June Mortgage update: and what we did with a big tax refund”

  1. Everyday Tips Says:

    Well, it is definitely a great problem to have!

    My answer depends on how much you already have invested in savings. It looks like you were leaning more toward extra-long term savings since the mortgage and retirement plans were given heavy consideration. That leads me to believe you probably have a lot saved in more accessible funds, although maybe you want to just live on the edge? :)

    I would probably split half with the mortgage and half toward a dividend focused fund of some sort. Oh, and I would buy some books.

    • nicoleandmaggie Says:

      There’s a year expenses in stocks and ~5 months in savings once this month’s bills clear (3 of which will be used to live on until we get paid again).

      We’re not at a point in our lives where dividends are going to do anything but be reinvested. Maybe in a year or two depending on DH’s job situation.

  2. bardiac Says:

    Whether it was the best decision, I don’t know, but it seems like a good, solid decision.

    Better than putting it up your nose as cocaine, right? (See, easy to win with me around.)

    And, if there’s a financial problem down the line, you can amortize a mortgage sometimes, giving yourself lower payments, right? And that can help deal with a lowered income level.

    Do you have to have an escrow acct at this point? Would it be better to save for taxes and pay your insurance on your own?

    • nicoleandmaggie Says:

      That is true, we can re-amortize down the line for lower payments. We actually bought a house we could afford on my salary alone (DH didn’t have a job yet at the time), so presumably we wouldn’t have to do that, but if child expenses got rough or I didn’t want to stop my cheese habit or we needed to move cities and couldn’t sell we totally could.

      We have an escrow account with the mortgage company. We don’t lose much money from them paying it each year– until this year (our house just dropped 20K in value this year) our property taxes have been going up up up and our mortgage company has been floating the difference (so we get that interest), adding that to the abysmal interest rates in saving, there doesn’t seem to be much point in switching to us administering it. If we ignore the fact that we pay in only 1/13 or so of what we owe each month and just pretend that we’re paying the mortgage company the lump sum at the beginning of the year rather than the end, that would be a savings of $33/year. Actual savings would be less. Right now that isn’t worth it to us, in the future it might be.

  3. Linda Says:

    I got a pretty solid tax refund this year, too, and then parked it in savings (at least it’s earning something at 1%) because I was trying to decide what to do with it. I’ve decided against putting it towards the mortgage. I do pay extra on the mortgage every month, but with home values continuing to drop and the difficulty of getting money out of a house these days (as you note) I just didn’t think it in my best interest.

    I’m meeting with a (fee-based) financial planner soon and maybe he’ll have some ideas. I can’t fund a Roth IRA because of income limits and investment choices are limited due to my work restrictions. Maybe it’s time to start a CD ladder; Ally and American Express have some fairly decent CD rates, and I doubt interest rates will rise that much in one year.

  4. Foscavista Says:

    What do you mean by “second-tier emergency fund”?

    • nicoleandmaggie Says:

      A first tier emergency fund would be money that is immediately accessible and capital preserving. So this would be savings accounts, laddered cds, money market funds. A second tier would be things you could tap into but are harder to get to and take on some risk. In my case, this is non-tax-advantaged stock accounts. They’re problematic because in the event of a major economic shock, stocks are tanking too, so there are risks to needing to liquidate when your personal economic shock coincides with a general economic shock. But a person doesn’t always want to put a year’s expenses in a savings account instead of the stock market.

  5. frugalscholar Says:

    I did the same and ended up paying off my house. I would LOVE another satisficing/sure thing to do with bits and pieces of extra money. Any ideas?

    I already do the Roth and max out the 403b.

  6. bogart Says:

    Hmmm. Does either of you have “old” 403bs/401ks (or similar, not sure how these rules apply to different accounts like 457s) and might you (have) rolled those over to IRAs and then converted to Roths? I realize it being 2011 you’ve lost the advantage of the 2010 conversion where you could have spread that part of the tax hit over 2 years but still, might be a worthwhile way to add diversity (non-taxability at withdrawal) to your pot without unduly complicating your lives. I took old accounts and did this myself in 2010, incurring a tax hit (that will whack me in 2011 and again in 2012) but should save me $$$ down the road if the future I anticipate comes to pass (earning, saving, and higher tax rates even holding those other 2 constant). And especially if Roths are otherwise a small or nonexistent part of your pot, could be useful.

    I loves me some Roth.

    • nicoleandmaggie Says:

      I wonder what the hell is going on with my retirement accounts (#2 speaking here). I guess we’ll all find out during this summer’s get-a-handle-on-my-money month.

    • bogart Says:

      No, wait, she says, replying to herself. You can definitely do this, regardless of your 403b (etc.) situation, at least up to $10K for the married one of you (am I right in thinking that’s N=1 for NicoleandMaggie?) and $5K for the unmarried. See http://www.kiplinger.com/columns/ask/archive/back-door-to-a-roth-ira.html . Just contribute after-tax money to a regular IRA and then convert it. And see above concerning my enthusiasm for Roths (misplaced or not) to understand why I’m bothering to point this out.

      • nicoleandmaggie Says:

        That was a limited time 2010 thing, to my knowledge. We did that this past year. :) As a benefit, our stocks had lost value (boo!) and we didn’t have to pay any of the rollover tax (yay!) (See: unexpectedly large refund.)

      • bogart Says:

        No, it’s not limited. The limited part is that in 2010 (only) if you converted you could spread the tax hit (if applicable, clearly not in your case :( ) over your 2011 and 2012 returns. I’m doing that. But in any year from 2010 forward as I understand it (see linked article) there is no limit on who can convert an existing IRA to a Roth, in terms of income. So if your income exceeds the Roth limits, just contribute to a traditional IRA (without the tax benefit, obviously, but so it goes) and then convert that IRA to a Roth. Admittedly if you convert the whole amount each year (i.e. do not maintain an open traditional IRA) this will be a mild administrative hassle, but well worth it (IMHO) for the Roth benefits. And no, you don’t have to pay taxes twice … anything that goes into your traditional IRA after being taxed (given that you don’t qualify for the tax benefits of the traditional IRA) can then be converted without a(nother) tax hit.

      • nicoleandmaggie Says:

        Huh. Interesting. Well, maybe we made the wrong decision. I will re-evaluate come October when we start getting paid again.

      • bogart Says:

        Eh. At the margin I do think my “decision” is likely better but both are good ones. Still, good to know all your options next time you need to decide.

      • nicoleandmaggie Says:

        Well, I could still do the 457 instead of the Roth, and it would probably be just as annoying in terms of hassle (and we could put 33K away instead of just 10K). It’s just a matter of hassle now vs. hassle later, and we’d probably actually want to do the conversion as soon as possible so as to minimize capital gains. We still have until April to do an IRA for the year. We’re already maxing out our 403(b), half in Roth half in traditional.

  7. Debbie M Says:

    I think any of those choices would be a “right” decision (unless you invested it in stocks that immediately plummeted). Looks like you cut about 7 months off the end of your mortgage, assuming you own your house that long.

    I like a multi-tier plan–in your position, I might have put half toward the mortgage and (if possible) half toward the 457.

    I’m just about to pay off my mortgage and I’ve decided to put half the old P&I payment toward my 403(b) each month and half toward something else–my renovation fund and/or a gardening fund (get someone to dig up the icky stuff and plant low-maintenance pretty native stuff) and/or random flexible savings (non-tax-advantaged account). Still deciding.

    • nicoleandmaggie Says:

      Congrats on paying off the mortgage! We’re maxing out our 403(b), but we’re making up for lost time while in graduate school.

      • Debbie M Says:

        I’m not rich enough to max out my 403(b)! I settle for maxing out my Roth IRA (which I am not too rich to do). I never did make up for lost time while in grad school and while paying off the college loans, but I do keep ramping things up. It’s all good.

      • nicoleandmaggie Says:

        But you’ve got an almost paid off home– that’s impressive!

  8. First Gen American Says:

    I’m a big fan of the lazy way. Guaranteed return, no risks, easy. Mine is still mostly sitting in my checking account. I haven’t found a good home for it yet. This is the first year ever that it’s been that way.


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