If that title isn’t click bait, then I’m not sure what is. Regardless, you might want to hear me out because I may give you an idea that will help you earn a return on that tax refund that you are [hopefully] receiving.
It’s that time of year, again. Today, April 18th, is affectionately referred to as “Tax Day”, and many of us will be receiving a tax refund from Uncle Sam. Last year, about 109M tax refunds were sent back to taxpayers, and that number will remain relatively unchanged this year. The total amount doled out was just over $306 billion, with the average refund right around $2,800. That’s a nice little chunk of change considering many individuals don’t even have $1,000 in savings!
So, if you will be receiving one of these deposits back from Uncle Sam I’m guessing you have been considering what to do with it. Maybe a nice bathroom remodel, savings for your kids’ school tuition, or maybe even a vacation. There are plenty of options (some smarter than others) that you can do with that refund check this year.
Some of your may consider putting this refund directly back into your savings account, BUT if you have a mortgage there might be a better option for you. You should consider applying your tax refund to your principal mortgage balance to pay it down quicker. This could be a great (or dare I say “the best”) option to earn a return on your refund this year.
What’s my rate of return?
Simply put, when you apply your money toward your mortgage you’re earning a rate of return (ROR) equal to the rate of interest on your mortgage. So for example, my mortgage rate is currently 3.73%, so my ROR on my refund will be about 3.73%. Now let’s compare that to a “high-yield savings account” at your bank with a return of 0.99% (clearly, that name is a bit of an oxymoron if you ask me).
Let’s say your have a mortgage of $200,000 on a 30-year fixed set at 4% and put that $2,800 refund toward the principal balance. You’ll save about $6,300 in interest over the life of the mortgage and the mortgage will be paid off roughly nine months sooner!
A word of warning
Now to be clear there are always exceptions, this may not be the best decision for everyone. If you are one of the aforementioned individuals with minimal savings I would highly recommend putting your refund in one of those “high yield” savings accounts so you have some cash accessible in case of a rainy day. But for those of you looking to stretch that refund a bit further consider putting it directly to your mortgage principal balance.