mortgage interest

Should you get a 15 or 30-year mortgage?

If you have asked yourself “Should I buy a home or keep renting” and properly considered the pros and cons of buying vs renting a home, you may choose to buy a house. After checking your credit, thoroughly considering your budget, and getting prequalified for a loan from the bank, you may have found a house you like. Now you need to decide what type of mortgage term is best for you.


Point 1: Real estate investors may want a 30-year mortgage

If you are a real estate investor who is buying a home for the sole purpose of using it as an investment property that you rent to someone else, then it is generally best to opt for a 30-year mortgage. As a real estate investor, you are using your tenant’s rent payment to pay off your monthly mortgage, so you are less concerned with paying off your mortgage as quickly as possible. Plus, opting for a 30-year mortgage lowers your monthly mortgage payments to the bank. This means you get to keep a larger portion of the rent your tenant pays you. Opting for a 30-year mortgage instead of 15-year mortgage as a real estate investor creates more cash flow each month, which increases your passive income.


Point 2: Deciding on 15 or 30-year mortgage varies based on your circumstances

The decision to get a 15 or 30 year mortgage is not as black and white for residential homeowners. If you are buying a home to live in yourself, the optimal loan term depends on factors unique to your own circumstances. For starters, the bank only offers 15 year mortgages to people who meet certain criteria. Only people with a certain credit score and debt-to-income ratio are eligible. Secondly, a 15-year mortgage has the advantage of offering a lower interest rate than a 30-year mortgage. This lower interest rate will save you lots of money over time. I’ll expand on this with the next point.


Point 3: A 15-year mortgage saves you money in interest payments

The main perk of having a shorter loan term, like a 15-year mortgage, is that your interest rate is lower AND the time on which you pay interest is shorter. Both of these factors save you lots of money in interest over the life of the loan. For example, let’s say you and your spouse want to buy a home that costs $250,000. Let’s also assume that you saved up 10% for a down payment (or that your parents gave you a very generous wedding gift for $25,000 that you then used on your home). If you chose a fixed 30-year mortgage with a 4.5% interest rate, by the end of the 30 years you would have paid back the $225,000 you borrowed PLUS an additional $185,000 in interest fees. You nearly paid double for the house!

However, if you had instead taken out a fixed 15-year mortgage (which usually comes with a lower interest rate, so let’s say 3.75% interest), then you would have paid back that $225,000 in 15 years in addition to paying only $69,000 in interest. By opting for the 15-year mortgage you paid off the home in half the time and saved $116,000 in interest payments! I don’t know about you, but I can think of a bunch of things I’d rather do with $116,000 than pay it to a bank in added fees. You are going to pay a lot of money in interest regardless, but the difference in interest you would pay on a 30-year mortgage compared to a 15-year mortgage is HUGE.


Point 4: A 30-year mortgage has lower monthly payments

In case I’ve just convinced you to opt for a 15-year mortgage, let me remind you of one downside. In order to pay the loan in 15 years, you have to pay the bank a much higher monthly payment. Using the example from above of a 250,000 home with a $25,000 down payment and a $225,000 loan, the payments on a 15-year mortgage at 3.75% interest are $1,919 per month.  The monthly payments on a 30-year mortgage at 4.5% interest is $1,423 per month, which means you pay almost $500 less each month. For many people, that difference of $500 is huge. They may want to take that $500 and put it into their 401K retirement account. Or, they may want use that $500 to pay back student loans, credit card bills, or other high credit card interest debt.


Point 5: There are other ways to save money in interest if you opt for a 30 year mortgage

Keep in mind that if you decide to get a longer mortgage term initially, all is not lost. The interest you pay on your mortgage over time will be higher, but there are ways to combat this. You can: 1) pay more than the required payment each month on your mortgage (if there is no prepayment penalty), 2) send in extra monthly payments each year, or 3) refinance your mortgage to a shorter term after a few years to lower the interest rate.


To Summarize, if you’re a real estate investor, you may want to opt for a 30-year mortgage. This will lower your monthly payments and increase your monthly cash flow. If you’re buying the home to live in yourself, it depends.

·      You may want to opt for a 15-year mortgage if you are established in your career with a steady salary and can afford the higher monthly payment.

·      You may want to opt for a 30-year mortgage if you would rather have lower monthly payments (at the expense of a higher interest rate) in order to pay off high-interest rate debt (credit cards and student loans) or fully maximize the employer match of 401K retirement accounts (if you have one).

If you decide to opt for a longer mortgage term now, you may be able to pay off the loan faster in other ways (i.e. by sending in extra payments, paying more than the minimum each month, or refinancing later).

10 Things To Remember Before You File Your Taxes

It’s tax time and most of us are getting ready to gather documents for one of our family members or a rep over at H&R block. Wait a second though. Instead of paying someone to file your taxes or merely hoping the person doing them doesn’t make any mistakes, why not try to learn a little about taxes (and how to reduce them) for yourself?

Learning how to do your own taxes probably isn’t number 1 on your bucket list, but face it.  No one is going to care as much about your money as you are.

The more you know, the more you can make sure you’re getting all the tax credits and deductions you can. Plus, learning about taxes helps you rethink how you can better structure your money next year to pay even less than you are paying right now.

As you think over the idea, here are a few things to remember to help you get through tax season this year:   

  1. Many people will pay less money in taxes this year. With the new tax law, there are a few allowances that many people benefit from. First, the tax rates are lower for people in each income bracket. For example, last year the marginal tax rate for single people with an adjustable gross income of least $38,000 was 25%, this year it will be decreased to 22%. Last year, the marginal tax rate for married couples with an adjustable gross income of at least $165,000 was 28%, this year it will be reduced to 24%. Along with lower tax rates for everyone, the standard deduction was increased this year to $12,000 for singles and $24,000 for married people. This means that many people will be able to deduct even more money and pay much less in taxes this year. 

  2. Consider filing taxes if you have student loans and are about to graduate. Although many full-time students don’t need to file taxes since they probably don’t have any income, there is an entirely different reason you may want to file taxes. Oftentimes, your student loan payments are based on how much money you made the previous year. In other words, they are “income-based.”

    If you can show an income of zero dollars this year when you file your taxes, when you graduate from your school in a few months and have to start paying back your student loans there is a very real possibility that your required payment will be zero dollars for the first year. How is this possible? The initial payment calculations are based on the income you made the last time you filed your taxes, so if you file taxes this year with an income of zero dollars then your student loan repayment for the first year may be zero. (This has happened for many graduating medical students who entered residency training programs as doctors so I strongly advise you to consult a student loan advisor and at least consider filing taxes. Many tax preparers will do it for you for free.)

  3. If your refund is large, then you should consider adjusting the amount you have deducted from each check throughout the year. Although it can feel nice to get a large refund each April, it may not be the wisest thing. Most of the time when you get a huge refund from the government after filing your taxes it is because you paid the government too much in tax money throughout the year. In other words, you had too much deducted from your check each month and the government is now returning the excess amount. Basically, you let the government use and invest your money as it wanted to and then return it back to you a year later.

    Because the government has this excess amount of YOUR money, you weren’t able to use that money during the year as you would have liked. Because the government had your money you were not able to invest that money in stocks or real estate etc. which would have allowed you to earn a profit on that money as interest. So even though the large check feels good, why would you allow the government to have access to your money just for them the return it back to you in April interest-free? It may be better to stop giving them the excess in the first place. Talk to the person who does your taxes. Consider having less money deducted from your check each pay period and instead use that money to increase your monthly income or invest it to make a profit.

  4. Tax credits and tax deductions are the key to helping you save money. Tax credits offset the amount you owe to the government in taxes “dollar-for-dollar.” Tax deductions reduce the amount you owe the government by a “percentage of each dollar.” Even though they are different, both tax credits and deductions are government incentives that lower your tax rate. They are the ultimate key to helping you save money in taxes so double check to make sure you have claimed all of the tax credits and deductions you are eligible for. Some examples of tax credits are: the family credit (for having kids), the education credit (to help offset the cost of college tuition), and investment tax credits (for business owners and investors who build low-income housing, do research, or develop innovative products and services). Examples of tax deductions are charitable contributions (money you give to charities, non-profit organizations and churches), health savings accounts, student loan interest, home mortgage interest, etc.  


  5. Make sure you’ve contributed as much as you can tolerate into your IRA (if you have one). I went through the basics of an IRA in a previous post, but in case you missed it (or skipped it), I’ll do a brief overview here. An IRA is an Individual Retirement Account that allows you to save and invest money for retirement in a way that lowers your taxes. When you save for retirement you don’t just let money sit in a savings account. Instead, the money in the retirement account is usually invested in the stock market with the hope of it making even more money in profits. When people invest money on their own, they must pay “capital gains” taxes on the profit they make. However, when people invest money inside of retirement accounts like and IRA or 401K, they are taxed at a lower rate and often don’t have to pay taxes on this money until years later.

    Since IRAs and 401Ks allow you to save money in taxes and delay paying some of the tax money you owe, it is best to put as much money into these accounts as you can afford. The deadline to contribute to a 401K was December 31st (unless you filed for an extension), but you can still contribute into an IRA up until the tax filing deadline and use that contribution to lower the amount of money you owe in taxes this year. Of note, the IRA and 401K contribution limits will increase for 2019 so you may be able to save even more money through these accounts next year.  

  6. Get proof of any charitable donations. It might seem a little weird to go calling your church about the tithe money you donated on Easter Sunday, but it can save you quite a bit of money on your taxes. The government likes when we give to those less fortunate or to charitable organizations so it gives us a tax deduction for doing so. When people file taxes, they can opt to reduce the amount they pay in taxes by taking a “standard deduction” (which is $12,000 for a single person or $24,000 for a married couple) or they can choose to “itemize” their deductions. As you start making more money and your income rises, the amount you pay in taxes may increase as well. One way to combat that it to itemize your deductions, especially if the total amount you “itemize” is higher than the default “standard deduction.”

    One of the things you can itemize is charitable contributions (including donations to nonprofits and churches). Most churches keep decent records and should already be mailing you a statement of your contributions over the past year, but if your church hasn’t sent you a copy of this record then you should definitely ask for it. In general, make sure you are keeping track of donations to churches, especially your tithes, in some sort of record-keeping book or app if you donate using cash. In order to deduct what you paid from your taxes, the government needs proof that you actually donated. It’s much harder to provide this proof if you pay with cash and/or if your church or organization doesn’t have the best accounting methods. Keep your own records, just in case.

  7. Be sure to deduct any mortgage interest you might have paid on your home. When you take out a mortgage to purchase a home, the bank charges you a fee when they loan you the money. That fee is called “interest” and you will pay a small percentage of it each time you send in your monthly mortgage payment to the bank. Since this “interest” is not being used to pay back the loan and is money that the bank receives as profit, the government allows you to deduct most, if not all, of this interest from your yearly taxes. In fact, you can deduct up to $750,000.

    Now you obviously cannot deduct what you didn’t pay. So, if you only paid $10,000 in mortgage interest last year, then you can only deduct $10,000 from your taxable income. Nevertheless, the limit is pretty high which means that most of the interest you paid will be deductible and work to lower how much you owe in taxes. This is important because oftentimes when you first buy a home, the mortgage payment you send to the bank each month is mostly interest. Thus, you can deduct this huge amount in interest from your taxes.

    This is one of the main reasons young, single, professionals who are high-income earners are encouraged to purchase a home or a condo instead of renting. The argument is that they could be paying off a mortgage and deducting a huge amount of that monthly mortgage payment from their taxes which would save them thousands of dollars in taxes each year. Now there are lots of other costs and fees associated with buying a home that you have to keep in mind and I briefly mention them here. Long story short, I don’t advise anyone to simply rush into buying a home just for the tax benefits, but I am saying that it can be a huge tax savings, everything else being equal.

  8. Get a statement of how much you’ve paid in student loans (particularly the interest). You may also be able to deduct the money you paid in student loan interest from your taxes. In fact, this deduction is similar to the mortgage interest rate deduction explained in above. When you pay back your student loans you are paying back the amount you originally borrowed (the principal) along with the fee the bank or the government charged you for borrowing the money in the first place (the interest). According to the tax law, you can deduct up to $2,500 of interest you paid towards your student loans from your taxable income (as long as you make less than $80,000 a year for a single person or $160,000 as a married person). 

  9. Calculate your business expenses and be sure to deduct them when you file. If you are self-employed, contract out your services, own a business, or have just launched a new website, you are eligible for deductions that can help lower your tax rate. For example, if you work from home, you can deduct a portion of your rent, internet, and electric bills as “business expenses.” You can even deduct the cost of gas as you travel to and from clients and include any educational materials or resources you purchased when you first started. Although you also must pay taxes on any income you get, the bonus of getting to subtract out any business expenses or materials you purchased is a decent deal. Just be sure to keep good records and/or download an app on your phone that makes it easy for you to scan and save receipts & invoices from clients.

  10. Real estate Investors can deduct even more money from their tax bill. If you are new to the world of real estate investing then you’ll be pleased to know that real estate investors can deduct a lot more money from their taxes than most other people. Notice I said real estate investors and not “homeowners.” If you simply own a home then you can usually only deduct the mortgage interest, BUT if you invest in real estate you can deduct a lot more than that. Real estate investors can deduct the cost of things like property taxes and insurance, repairs and maintenance (up to a certain point), transaction costs in the form of “amortization,” etc. Plus, with the new tax law, there are even more deductions. For example, real estate investors can now deduct even more depreciation sooner through new forms of cost segregation and may even be able to deduct a large percent of the purchase price (via the 20% income pass through deduction) if they meet certain qualifications. The nuances of tax deductions for real estate investors can get quite complicated and I won’t pretend to know them all. My point is that if you invest in real estate you are probably eligible for more deductions than you think, which would drastically lower the amount of taxes you owe. I’d strongly advise you to get a tax advisor that specializes in real estate.


To summarize:  You should consider learning a little bit about taxes. Even though you may not want to actually file your own taxes, learning some basics will help you figure out how to structure your life to save more money in taxes each year. Students graduating from undergraduate, masters or doctoral programs should consider filing their taxes this year so that their income-driven loan repayment is zero dollars for the first year. Everyone who files taxes should know that qualifying for more tax credits and tax deductions are the key to saving you more money.

If you are going to get a big refund in April, you are probably having too much money deducted from each of your paychecks. You should speak with a tax advisor about reducing it, so you can have more money on your check each pay period. Contributing more money to an IRA account will save you more money in taxes and you still have the chance to contribute to this account before you file your taxes this year. If you give to charity or pay tithes, get proof of how much you gave because it can lower how much tax money you owe.

If you bought a home or have paid money in student loans get a statement of how much money you paid in interest because you can subtract that interest money from the amount of taxes you owe. Anyone who owns a business can subtract “business expenses” even if the business just began and hasn’t started making money yet. Lastly, real estate investors are eligible for many deductions this year so they should be sure to consult with a tax advisor that specializes in that particular area and use the IRS website as a guide.

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