mortgage

Use tax refund to cut my mortgage payment?

Steve BucciDear Debt Adviser,
I am a first-time homeowner and just received a $5,000 tax refund. Is there a way to use it to lower my mortgage payment (not the length of time I pay)?
-- Marci

Dear Marci,
As a first-time homeowner, I'll forgive you for getting a $5,000 tax refund. Many people don't realize the great tax advantages of owning a home until after they purchase one. A rent payment of $1,500 a month is much more expensive than a mortgage payment of $1,500 because almost all of the mortgage payment is deductible from your taxable income, thanks to the mortgage interest deduction. The result for you is a sizable windfall.

You do have a few options to lower your mortgage payment: one short-term, one medium-term and one long-term. Let's start with the short-term solution.

You could place your $5,000 tax refund into a savings account, and withdraw a portion of it each month to help with your mortgage payment. For example, if you wanted to have a slightly lower payment for the next five years, you could withdraw $83 each month from your savings of $5,000. So if your mortgage payment is currently $1,500, you would need to use only $1,417 of your income to make the payment. Your savings would make up the rest. (You could drastically reduce your mortgage payment by $416 per month, but your $5,000 in savings would be gone in only one year.)

The long-term approach to lower your mortgage payment is to research refinancing opportunities. Contact your current lender and a couple of competing lenders, and find out what terms you would qualify for in a refinance of your mortgage. Be sure to do all your loan shopping within a 30-day period so the credit inquiries will count as just one, for credit-scoring purposes. Once you know what terms you can expect, use Bankrate's calculator to determine if refinancing will meet your goal of lowering your mortgage payment.

A medium-term option is to adjust your withholding so your annual tax refund is smaller -- only $500 or so, instead of $5,000. Ask your human resources department at work to increase your personal allowances so that about $3,500 less is taken out over the course of the year. You'll then have an additional $300 or so each month after taxes that you can use to further lower your mortgage payment.

If you are trying to lower your payments because they are too high for you to comfortably afford, and you may be in danger of missing a mortgage payment because you don't have enough income to consistently pay what you owe each month, seek help now. The nonprofit Homeownership Preservation Foundation operates the Homeowner's Hope Hotline at (888) 995-HOPE, which can put you in touch with a housing counselor. The counselor will help you decide how to best solve a mortgage payment problem and avoid home foreclosure.

Good luck!

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