By Steve Bucci | Bankrate.com
Dear 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)?
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.