Lower Payments and a Tax Break?

[Random guy]

Most of us can create uncontrollable debt without even knowing exactly how we did it.

We look at that billing statement with the big numbers and try to remember where the money went. A few dinners here, some gear there, a short fishing getaway, late charges and, finally, over-the-limit fees. Then add lots of interest that your parents used to be able to deduct from their taxes but you can't.(more about this later)

What makes it worse is that when you're on a fixed paycheck, it's difficult to pay off that debt incurred in good times past. The best solution is to get a clean break by realigning that higher interest variable debt into fixed rate, safe and secure debt.

Why Tap Home Equity?

Most home equity loans or refinance loans are taken either to:

• Make improvements that add to the value and enjoyment of the home, or

• Consolidate nagging debt and increase monthly cash flow

If you are borrowing to remodel or improve, you feel OK about the borrowing, since you know you're adding value to your home.

However, when you're borrowing to refinance credit cards and consolidate your other loans, the decision gets more difficult.

A lot of people find themselves with far more debt than they can handle from credit cards or tough times. If you're in this situation, start arranging to refinance the debt into a safer and less costly structure.

In fact, if you're really feeling financially daring, add enough money to get that boat that you couldn't get when you were maxed out on the credit cards. Just kidding

Enough joking around, remember that you already have this debt. Now we need to find a solution tailored to fit your goal of controlling this debt.

Refinancing’s Many Benefits

Refinancing your debt doesn't increase your monthly liabilities. It will most likely cost you much less by lowering the interest rates, losing processing fees, and stopping those “mystery fees” some companies like to charge on their collections. Closing costs of the refinance are normally absorbed by the monthly savings within a few months; then the savings turn into CASH IN YOUR POCKET!

Credit Cards and Taxes

By refinancing, you're shifting the debt from various credit cards with differing due dates to one lender at a lower interest rate with a fixed repayment plan. In addition to the convenience of consolidating payments and payment dates, you create a tax benefit similar to pre-1987, when you could write off credit card interest on your taxes. Plus, the money saved every year on your taxes by writing off your interest can be put back towards paying off the debt instead of paying for a $400 pen holder at the Capitol.

Another upside to this strategy is that it leaves you with refreshed credit limits on the balances of your credit cards and other “lines of trade” driving your credit score up…as long as these accounts are not run back up.

There are many benefits to streamlining your financial structure. The most important of all these benefits is the financial security and freedom of your household.

Give me a call or email me to see what I can do to put your debt in the proper places and decrease the cash leaving your pocket every month.

[GenzisGod]

Hi Jon, just curious, if a person were to take out a home equity loan, what can you actually write off. Can you right off all the interest you pay, or can you only write off home improvements with receipts? Thanks in advance for the advice.

[Random guy]

Every situation is different and unique in its own way. Many factors fall into what can and can’t be written off. There are so many factors at play the only true way to answer what you personally can write off at the end of the year is up to you and the professional that prepares your taxes. Ask your tax accountant what options you have for deductions or write-offs. I personally am able to write off my interest that is paid towards my mortgage.

[slabberknocker]

What Jon has said is all good and very important to look at. To even take that a step farther is to remember that "Cash is King" We all would agree that paying for an item with cash in hand is the ulimate way to buy. Sometimes that is not always possible, and that is where refinancing or home equity line of credit may come into play. To play out a scenario on why cash is king, think about the following:

There are two brothers with $70,000/year jobs. Both brothers are going to buy a $200,000 house. Both have $40,000 in savings

Brother A believes in the "old" way of paying off the mortgage as soon as possible. So he goes and gets a 15 year mortgage at 5.12% (5.44 APR) and then puts down a big payment of $40,000. Zero left to invest. This leaves him with a $1,275 monthly payment (56% is tax deductible first year/ 28% average) $1,153 average monthly net after-tax cost (assuming a federal/state income tax rate of 32%). He also sends an extra $100 a month to lender to in effort to eliminate mortgage sooner.

Brother B believes in the "new" way of carrying a big, long mortgage with a 30 year interest only at 6.11% (6.29% APR). He puts down a small down payment of $10,000 with $30,000 left to invest. He has a $967 monthly payment (100% is tax deductibe the first 15 years/59% average). This leaves him $657 monthly net after-taax cost. Now brother B adds $100 monthly to invest plus the $496 saves from lower mortgage payment, where the account earns 8% rate of return. (75 year average has been around a 12% return, so we are being conservative).

Now 5 years later:

Brother A- Recieves $11,286 in tax savings. (Assuming federal/state income tax rate of 32%) Has $0 in savings and investments.

Brother B- Recieves $18,574 in tax savings. (Assuming the same federal and state tax rate.) Has $88,428 in savings and investments- asssuming an 8% return.

Now, both brothers lose their jobs.

Brother A- Has no savings to get through the crisis. Can not get a loan, even though he has $87,247 in equity, because he has no job. Must sell house because he cannot make those big payments.

Brother B- Has $88,428 in savings to get him through it. He does not need a loan and can make his mortgage payments easily because of savings. He has no reason to panic "Cash is King".

Now after 30 years. Neither brother lost their job.

Brother A- Recieved $19,702 in tax savings and has $567,148 in savings and investments (house paid off in 15 years). Owns home outright.

Brother B- Recieved $87,927 in tax savings and has $1,215,069 in savings and investments and pays off house at the end and owns the home outright.

Who came out better. People who understand how money works choose to carry a big, long mortgage and never pay it off.

It does come down to discipline though. If Brother B was not disciplined and spent that extra money each month he would have been burned financially. It is said that only 5% of people will be able to retire with enough money. That leaves 95% of people left to work their whole lives.

When you buy a house for $100,000, after 30 years, how much have you increased your net worth? $100,000 assuming no appreciation. ( Now we know there will probably be on average a 3% annual appreciation on your home, depending where you live) Go interest only or a low start rate of 1% for example (where your monthly payment can only increase by 7.5% yearly) and take that extra money to invest or pay off revolving debt. It is a common belief to send extra money to the mortgage lender and only pay the minimum each month to the credit card. Which has a higer interest rate? Which interest is not tax deductible? I think everyone knows the answer.

Also interest paid is simple interest. Interest earned is compound interest. That is another thing to think about.

This just scraches the surface of how money works. As you can see I am pretty passionate about money, would alway like more, and like to educate people on it. I guess that is why I am a teacher. Banks make enough off us already in interest. Why give them more of our money so they can turn around and lend it out over and over by the credit cards they issue.

Hopefully a lot of this makes sense. This is my first time typing this much about money. I have a lot more to say but it is hard to let my fingers do the talking.

Slab

The above scenario was adapted from The Rules of Money- by Ric Edelman

[Down to Earth]

Now I'm not going to claim to be a financial expert and I can see your reasoning, but I guess you have to say every situation is different. I've run the same situation of paying off my debt or maintaining my mortgage the full 30 years and I come out way ahead if I pay off early. I'm on an accelerated debt payment plan and will be debt free in 7.5 years, plus come out ahead when I retire savings wise.

So, I guess I would fall under the "old" way of thinking. I know there are pros and cons doing it each way, but to me I'd rather save the hundreds of thousands in interest for myself rather than giving it to the bank. True there is a "tax advantage", but it pales in comparison in how much interst I'm doling out. Besides once I have have my mortgage paid off I still will have a tax break as I will be able to fully max out my wife and my 403( and enjoy the tax break there while making money with it instead of the banker making the money.

I guess what I really trying to say is everyone has to look at their situation individually and decide what is right for them.

Andy

[DTro]

Let me just say this....

I purchased my house on a 30yr, refinanced to 15 when the rates were rock bottom and recently refinanced back to 30 to pay off a basement refinish and some debt (student loans...etc).

I think I could probably make a point either way, it's very nice to pay down that mortgage, but not a lot of fun when sometimes there was too much month left at the end of the money.

I won't turn this into a discussion.

The point I was trying to make was that my wife initiated the refinance and we got a quote. I emailed Jon and he was very honest and helpful. I'm not the kind of guy that wastes others time and screws them to save a few bucks, so I went with the company my wife chose.

Had I to do it over again I wouldn't hesitate to throw Jon my business.