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Money Matters: Homeowner with ‘extra money’ seeks refinancing advice

Q. I recently wrote my daughter’s last tuition check. She graduated in December debt-free. Should I now pay down my $700 per month mortgage faster? If so, how much, and what are the implications of a lower mortgage interest deduction on my tax return? I had some college savings plans and supplemented this with about $300 per month from my income. Should I put all of that toward my mortgage every month? The bank is encouraging me to refinance from 6.875 percent to around 3.6 percent. Would I accomplish the same thing by just paying more on the principal? My mortgage balance is $78,856 with about 15 years left to pay. The bank mentioned the HARP program, what is this? I also have some other things I’d like to spend money on such as cosmetic improvements to the house and replacing my 16-year-old vehicle. I’ve always saved, and my retirement accounts are doing well. I’m on track to be able to retire before I actually want to, so funding retirement is not a concern. Any suggestions as to where to apply my “extra” money now that my lovely daughter is off my payroll would be appreciated.

A. Congratulations to you and your daughter! Allowing your daughter to graduate without debt is a wonderful gift. To do so, it doesn’t sound like you sacrificed your retirement savings. Way to go!

The Federal Housing Finance Agency extended the deadline for the Home Affordable Refinance Program (HARP) to Dec. 31, 2015. HARP is a federal program that enables eligible homeowners with little to no equity in their home to refinance. In other words, people who owe more on their mortgage than their home is worth. To be eligible for HARP the minimum requirements include: Current home loan must be owned or guaranteed by Fannie Mae or Freddie Mac; loan must have been originated on or before May 31, 2009; you must be current on your monthly payments and must not have had payments more than 30 days late within the past six months and not more than one late payment in the past 12 months; the home being refinanced must be your primary, second home or investment property; and the loan to value ratio (LTV) must be greater than 80 percent. LTV is calculated by taking the mortgage balance and dividing it by the fair market value (FMV) of the home ($80,000 mortgage divided by a FMV of $90,000 = LYV of 88.89 percent. Take the quiz on, a website operated by Fannie Mae, to see if you qualify for HARP.

Regardless of whether you decide to refinance under HARP, refinance without HARP, increase your current payment or a combination of these options, I wouldn’t worry about the interest deduction. In 2015, most single tax filers will have a standard deduction of $6,300, or $12,600 if married. Only itemized deductions above these amounts offer tax benefits. Even if the mortgage interest brings your itemized deductions over the standard deduction amount, the tax savings don’t justify paying more interest than you need to. If you are in the 25 percent tax bracket and have $5,000 in tax-deductible mortgage interest, above and beyond your standard deduction, you save $1,250 in taxes but you’ve still paid $5,000 in interest. If your total itemized deductions are at or below your standard deduction, your interest payments don’t provide tax savings.

If you do nothing, in 15 years your mortgage will be paid off and you will have paid $47,137 in interest. If you add an additional $300 to your existing mortgage payment, your mortgage will be paid off in 8.6 years and you will have paid $25,928 in interest. If you refinance at 3.6 percent and continue to make your current $700 monthly mortgage payment, your mortgage will be paid off in 11.4 years and you will have paid $17,518 in interest. If you refinance at 3.6 percent and make monthly payments of $1,000, your mortgage will be paid off in 7.5 years and you will have paid $11,255 in interest. I think it makes sense to refinance, even if you incur some closing costs. If you agree and proceed, make sure there are no pre-payment penalties with the new mortgage.