Why I’m Glad I Have Someone Do Our Taxes

I’ve been lucky enough to have someone do my taxes for as long as I’ve ever had to file them.  How did I get so lucky? Because my dad has been lifelong friends with the guy that does them, and he’s always treated our family very well.

I’ve never questioned his ability, but whenever I see something I don’t understand on a tax return, I ask about it, for the simple sake that I want to understand things.

We re-financed our mortgage last year, so when I was estimating our tax return, I entered the closing costs, but when our tax return came back, this wasn’t on here.  Only a small portion was.

I knew he was correct.  He always is.  So, I didn’t sweat it and in fact I waited until after tax season was done before I dropped him an e-mail asking why the closing costs were nowhere to be found.

He wrote back explaining that for a re-finance, the deduction is spread out over the original term of the loan. Our deductible closing costs were roughly $1,200 for the 15-year mortgage, meaning that we’ll see roughly $80 written off each year for the next 15 years.  In fact, there was $20 written off in 201, which makes sense given that we re-financed with three months left in the year.

(FYI: For an original mortgage on the property, you can write off the entire closing amount for the year in which the closing took place.)

Good to know!

When it comes to doing taxes, I know that I could likely enter the big stuff.  But, honestly, it’s the little stuff like this which makes me really, really glad that we have someone do our taxes.

And not just any someone, but someone we completely trust.

Do you  have someone do your taxes?  Did you know about the re-finance amortization requirement when it comes to writing off the closing costs?

The Wrong Thing To Focus On When Re-Financing

We re-financed last year as have many homeowners who are taking advantage of historically low rates.

One thing that I’ve seen in some of the discussions about re-financing is a focus on the wrong thing.  See if you can spot what’s wrong with the following hypothetical statement:

“Our current 30 year rate is 6% but we’re able to get our re-financed 30-year loan at 4.25%.  This will save us $350 per month!”

On the surface, this looks like great news all around.  Lower interest rate, saving more money, what could possibly be wrong?

Simple: The focus on the monthly payment is misguided.

In this scenario, you’re going from an existing 30 year mortgage to a new 30 year mortgage.  This means it’s thirty years from the re-finance date, meaning that your total time of paying the bank is thirty years plus however long you already spent on the original thirty year note.  If you’ve been paying for five years, that means you’ll be working on this loan for thirty five years.

On top of that, part of the ‘monthly savings’ that the hypothetical homeowner is so happy about comes, not from the lower rate, but from the fact that they’re spreading the remaining balance over additional years (in the example above, thirty years versus twenty five years).

When you’re re-financing, it’s my advice to look at how much time you have remaining on the existing mortgage, and strive to shorten it, or at worst, keep it the same.

In the example above where the homeowner has already paid five years on the original note, their new mortgage should be no greater than twenty five years.  Ideally, they should go for a fifteen year note.

This could mean that the homeowner might have to pay more than they did every month.  If you’re looking at only the bottom line, many will rule this out, even if they have the income to do so.  But the benefits are tremendous: You’ll apply a ton more toward principle and you’ll get done paying the mortgage that much earlier.  And your interest rate will be lower.

In the example above, going to a fifteen year mortgage might end up costing the homeowner an extra $150 over what they’re paying today.  If they can afford that, though, they shave a total of ten years off of the time that they pay on the house, and they pay a fraction of the total interest cost.

Now, if your payments are already stretched to the limit, fine.  Go ahead and get the thirty year re-finance, but instead of banking that extra money from the lower payment, keep your payment the same as what you were paying.  One hundred percent of that extra payment goes toward principle, so you’ll end up paying the mortgage off way faster, keeping with my goal not to exceed the term of your original loan.

In the example above, sticking with a 30 year note but plowing that ‘saved $450’ right back into the mortgage could have them paying the new loan off in, say, twenty years.  Add the five years from the original note, and they’re paying for a total of twenty five years, still way ahead of the original thirty year loan.

That’s five years less of stress!

If you’re in the market for a re-finance, great.  Just make sure to focus on the right numbers!