What would you do with unexpected tax refund?

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johnsac
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What would you do with unexpected tax refund?

Post by johnsac » Tue Oct 16, 2018 11:18 pm

After some extensions with the IRS due to my accountant being behind we finally got our 2017 taxes done and received a refund of about 26k. Count me a surprised, we usually get just a small amount back. So, 26k of found money - what would you do? if you were me? (44 years old, 3 kids at home, 2 years into a 30 year mortgage, fully funding Simple IRA to the tune of nearly 28K between my wife and I in my business)

Option 1. Take the 26K and pay off the remaining amount on the 2 car loans we have plus childs hospital stay, which in total are around 25k. However 2 of the 3 of these debts are at 0% interest, the 3rd at 2.5% interest is all.

Option 2: Take the 26k and pay down my mortgage. We currently pay PMI insurance to the tune of $255 a month and will be for the next 7 years. By putting the 26k toward the mortgage, and with the home appreciation we've had, I should be able to get the $255/month removed.

Option 3: Put it into the markets in some investment vehicle, (I'm new to Bogleheads and not financially versed very well yet) and hope to grow it.

Thoughts?
Last edited by johnsac on Wed Oct 17, 2018 5:18 am, edited 1 time in total.

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Re: What would you do with unexpected tax return?

Post by grabiner » Tue Oct 16, 2018 11:36 pm

First, check your tax returns; it's possible that your accountant made an error or you forgot to enter some source of income. You don't want to do anything with the $26K and then get a letter from the IRS next year that you owe it back.

Next, check the terms of your mortgage, to ensure that you can actually get rid of the PMI with an early payment. Some mortgages won't let you get rid of mortgage insurance until the mortgage would have reached a certain loan-to-value on the original schedule, or will require a re-appraisal.

Assuming that you can, getting rid of the PMI is a good deal. Even without the PMI, paying down a 4% mortgage is a risk-free 4% return. But you get an additional $3060 per year over the next seven years, which is an extra 11% annually for those seven years. If you happen to sell the house in seven years, your return over those seven years will be 15%, risk-free.
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celia
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Re: What would you do with unexpected tax return?

Post by celia » Tue Oct 16, 2018 11:40 pm

Why is your tax return unexpected? Don't you usually have to file? For 2018, if your income is the same and you don't have to file, it's because the tax laws were changed last year and took effect this year.
Last edited by celia on Tue Oct 16, 2018 11:45 pm, edited 1 time in total.

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Re: What would you do with unexpected tax return?

Post by whodidntante » Tue Oct 16, 2018 11:40 pm

I found $100 once. I probably spent it on whiskey. Your "find" was not a find, but the result of tardy accounting and tax overpayment. I would rather find $100 than to get my own money back late.

I would not do option 1 because I don't pre-pay low interest debt. I might do option 2 sufficient to kill the PMI. I would not do option 3, but if you had said you would invest it according to your desired asset allocation instead of "some investment vehicle" then OK.

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Re: What would you do with unexpected tax return?

Post by Watty » Tue Oct 16, 2018 11:47 pm

johnsac wrote:
Tue Oct 16, 2018 11:18 pm
Option 2: Take the 26k and pay down my mortgage. We currently pay PMI insurance to the tune of $255 a month and will be for the next 7 years. By putting the 26k toward the mortgage, and with the home appreciation we've had, I should be able to get the $255/month removed.
If that is a 4% mortage then is almost a 16% return when you consider the interest and PMI combined so that would be a simple choice. As the other poster said it you should verify this before you sent them the money.

You may be able to do a "mortage recast"(Google this) at the same time. The way this works is if you pay the loan down by 10%(or whatever) in a recast then your required monthly payment will be reduced by the same percentage.

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Re: What would you do with unexpected tax return?

Post by johnsac » Tue Oct 16, 2018 11:53 pm

grabiner wrote:
Tue Oct 16, 2018 11:36 pm
First, check your tax returns; it's possible that your accountant made an error or you forgot to enter some source of income. You don't want to do anything with the $26K and then get a letter from the IRS next year that you owe it back.

Next, check the terms of your mortgage, to ensure that you can actually get rid of the PMI with an early payment. Some mortgages won't let you get rid of mortgage insurance until the mortgage would have reached a certain loan-to-value on the original schedule, or will require a re-appraisal.

Assuming that you can, getting rid of the PMI is a good deal. Even without the PMI, paying down a 4% mortgage is a risk-free 4% return. But you get an additional $3060 per year over the next seven years, which is an extra 11% annually for those seven years. If you happen to sell the house in seven years, your return over those seven years will be 15%, risk-free.
Thanks Grabiner. On your questions:
1. I dont think an error was made, we pay estimated taxes since I own my own biz and we estimated revenue would be higher than it was for the 4th q.
2. Yes, I did talk with the mortgage co and I can get rid of the PMI so long as the house appraises for a certain loan to value but I do need a re-appraisal. Homes in our market have gone up a lot since we purchased it 2.5 years ago, and we also bought low since it was a foreclosure/trashed home which we've spent the last 2.5 years fixing up. So I will have to pay for the reappraisal but with the comps in my neighborhood and the 26K that I could put towards a paydown of the mortgage I think that it is highly likely I'd get rid of the monthly PMI.
Thanks for the thoughts on the extra 11 percent annually by eliminating the PMI, that makes it pretty attractive to go that route.

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Re: What would you do with unexpected tax return?

Post by johnsac » Tue Oct 16, 2018 11:56 pm

celia wrote:
Tue Oct 16, 2018 11:40 pm
Why is your tax return unexpected? Don't you usually have to file? For 2018, if your income is the same and you don't have to file, it's because the tax laws were changed last year and took effect this year.
Celia - it was unexpected because we dont typically get a big return, maybe just a little money. But because we pay estimated taxes we estimated that we'd make more than we actually did and paid taxes on that estimate, to the tune of more than we needed to, thus the refund.

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Re: What would you do with unexpected tax return?

Post by johnsac » Tue Oct 16, 2018 11:58 pm

Watty wrote:
Tue Oct 16, 2018 11:47 pm
johnsac wrote:
Tue Oct 16, 2018 11:18 pm
Option 2: Take the 26k and pay down my mortgage. We currently pay PMI insurance to the tune of $255 a month and will be for the next 7 years. By putting the 26k toward the mortgage, and with the home appreciation we've had, I should be able to get the $255/month removed.
If that is a 4% mortage then is almost a 16% return when you consider the interest and PMI combined so that would be a simple choice. As the other poster said it you should verify this before you sent them the money.

You may be able to do a "mortage recast"(Google this) at the same time. The way this works is if you pay the loan down by 10%(or whatever) in a recast then your required monthly payment will be reduced by the same percentage.
Mortagage recast, never heard of it but I'll research it. Thanks a lot for the suggestion!

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Re: What would you do with unexpected tax return?

Post by johnsac » Wed Oct 17, 2018 12:00 am

whodidntante wrote:
Tue Oct 16, 2018 11:40 pm
I found $100 once. I probably spent it on whiskey. Your "find" was not a find, but the result of tardy accounting and tax overpayment. I would rather find $100 than to get my own money back late.

I would not do option 1 because I don't pre-pay low interest debt. I might do option 2 sufficient to kill the PMI. I would not do option 3, but if you had said you would invest it according to your desired asset allocation instead of "some investment vehicle" then OK.
Specific to #3, I'm just in the process of transferring our $ to Vanguard from another company that was charging us a good chunk for management fees. So for the time being I dont know what that desired asset allocation is or what investment vehicles we'll have in place......I've got an upcoming call with an advisor from Vanguard to discuss that, but for the time being I dont know what it will be. Hope that makes sense.

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Re: What would you do with unexpected tax return?

Post by celia » Wed Oct 17, 2018 12:28 am

johnsac wrote:
Tue Oct 16, 2018 11:56 pm
celia wrote:
Tue Oct 16, 2018 11:40 pm
Why is your tax return unexpected? Don't you usually have to file? For 2018, if your income is the same and you don't have to file, it's because the tax laws were changed last year and took effect this year.
Celia - it was unexpected because we dont typically get a big return, maybe just a little money. But because we pay estimated taxes we estimated that we'd make more than we actually did and paid taxes on that estimate, to the tune of more than we needed to, thus the refund.
LOL, I was commenting on your unexpected "tax return", not your unexpected "tax refund". Of course, YOU got a tax refund this year, but many people don't need to file... until they do need to. THEY weren't expecting to have to fill out a "tax return". :D

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Re: What would you do with unexpected tax return?

Post by ResearchMed » Wed Oct 17, 2018 4:12 am

celia wrote:
Wed Oct 17, 2018 12:28 am
johnsac wrote:
Tue Oct 16, 2018 11:56 pm
celia wrote:
Tue Oct 16, 2018 11:40 pm
Why is your tax return unexpected? Don't you usually have to file? For 2018, if your income is the same and you don't have to file, it's because the tax laws were changed last year and took effect this year.
Celia - it was unexpected because we dont typically get a big return, maybe just a little money. But because we pay estimated taxes we estimated that we'd make more than we actually did and paid taxes on that estimate, to the tune of more than we needed to, thus the refund.
LOL, I was commenting on your unexpected "tax return", not your unexpected "tax refund". Of course, YOU got a tax refund this year, but many people don't need to file... until they do need to. THEY weren't expecting to have to fill out a "tax return". :D
Yes, I had the same reaction to your thread title.

What you mean is that you had an "Unexpected Tax Refund".

The fact that you had to "file a tax return" apparently was NOT "unexpected"

To avoid confusion, could you go back to your FIRST post on this thread please? You will see a little "pencil icon" in the upper right corner. Click that to "edit" your first post, and simply change the title. When you "submit" that, it will immediately change the title in the "list of titles". It will also change the title in each reply, but *only* for new replies that are submitted after you have changed the title.

Many thanks!

And yes, just double check that the *refund* is accurate! It would be dreadful to, for example, pre-pay a nice chunk of your mortgage, and *then* find out the *tax return* contained an error. Ouch!

And a belated welcome to Bogleheads!

RM
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Re: What would you do with unexpected tax return?

Post by indexonlyplease » Wed Oct 17, 2018 5:00 am

Get rid of the interest payments. Work on being debt free.

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Re: What would you do with unexpected tax return?

Post by oldcomputerguy » Wed Oct 17, 2018 5:11 am

johnsac wrote:
Tue Oct 16, 2018 11:18 pm
After some extensions with the IRS due to my accountant being behind we finally got our 2017 taxes done and received a refund of about 26k. Count me a surprised, we usually get just a small amount back. So, 26k of found money - what would you do? if you were me? (44 years old, 3 kids at home, 2 years into a 30 year mortgage, fully funding Simple IRA to the tune of nearly 28K between my wife and I in my business)

Option 1. Take the 26K and pay off the remaining amount on the 2 car loans we have plus childs hospital stay, which in total are around 25k. However 2 of the 3 of these debts are at 0% interest, the 3rd at 2.5% interest is all.

Option 2: Take the 26k and pay down my mortgage. We currently pay PMI insurance to the tune of $255 a month and will be for the next 7 years. By putting the 26k toward the mortgage, and with the home appreciation we've had, I should be able to get the $255/month removed.

Option 3: Put it into the markets in some investment vehicle, (I'm new to Bogleheads and not financially versed very well yet) and hope to grow it.

Thoughts?
Option 4: put it in Ally and wait for the IRS to realize their mistake?
:shock:

Sorry about that.

Seriously, if it were me, I'd likely lean toward option (2), then once I got the PMI removed, I'd take that cash I saved each month and put it on option (1) until I got those cleared. Then I could start thinking about option (3) once I had more cash flow coming in.
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Re: What would you do with unexpected tax return?

Post by johnsac » Wed Oct 17, 2018 5:19 am

celia wrote:
Wed Oct 17, 2018 12:28 am
johnsac wrote:
Tue Oct 16, 2018 11:56 pm
celia wrote:
Tue Oct 16, 2018 11:40 pm
Why is your tax return unexpected? Don't you usually have to file? For 2018, if your income is the same and you don't have to file, it's because the tax laws were changed last year and took effect this year.
Celia - it was unexpected because we dont typically get a big return, maybe just a little money. But because we pay estimated taxes we estimated that we'd make more than we actually did and paid taxes on that estimate, to the tune of more than we needed to, thus the refund.
LOL, I was commenting on your unexpected "tax return", not your unexpected "tax refund". Of course, YOU got a tax refund this year, but many people don't need to file... until they do need to. THEY weren't expecting to have to fill out a "tax return". :D
LOL got it, I fixed in the original post. Thanks!

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Re: What would you do with unexpected tax refund?

Post by IndyAtty » Wed Oct 17, 2018 6:48 am

I would at least pay the bill for the hospital stay. Doctors/hospitals aren’t in the lending business. Your child received important services, and the health care providers should be paid for that.

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Re: What would you do with unexpected tax refund?

Post by jebmke » Wed Oct 17, 2018 7:00 am

Once you sort out what to do with the money I would still go back and re-look at the process and the capability of your tax practitioner.

In most cases there should be no reason for a surprise refund at this late date. First, the fourth quarter payment isn't due until January 15 and for many (most?), one should be able to make a reasonable estimate of full year income to true up the estimated payments with an adjustment to the 4th quarter. Certainly by the time you file an extension, you should have a pretty good pro forma of your tax return. If your tax preparer cannot provide this level of service, I'd argue that you need to look for someone else to do this.
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Re: What would you do with unexpected tax refund?

Post by 8foot7 » Wed Oct 17, 2018 7:12 am

That is a heck of a large refund to not expect. Even if you can't figure out if it's not an error, it might be. That's a really big number to not know is coming. If it were me with my aversion to the IRS, I think I'd sit on the money for a year or so and make sure they didn't come looking for it again.

If you're willing to gamble a little bit on it not being an error, then I agree with paying down to get rid of PMI. Paying expensive insurance that will benefit someone else and not you is a complete money-loser so the sooner you're out of that, the better off you'll be.
Last edited by 8foot7 on Wed Oct 17, 2018 7:15 am, edited 1 time in total.

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Re: What would you do with unexpected tax refund?

Post by 8foot7 » Wed Oct 17, 2018 7:13 am

jebmke wrote:
Wed Oct 17, 2018 7:00 am
Once you sort out what to do with the money I would still go back and re-look at the process and the capability of your tax practitioner.

In most cases there should be no reason for a surprise refund at this late date. First, the fourth quarter payment isn't due until January 15 and for many (most?), one should be able to make a reasonable estimate of full year income to true up the estimated payments with an adjustment to the 4th quarter. Certainly by the time you file an extension, you should have a pretty good pro forma of your tax return. If your tax preparer cannot provide this level of service, I'd argue that you need to look for someone else to do this.
This.

I understand a couple of grand but if your tax preparer is off by 26k I'd find a new one.

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Re: What would you do with unexpected tax refund?

Post by MarkNYC » Wed Oct 17, 2018 8:28 am

8foot7 wrote:
Wed Oct 17, 2018 7:13 am
jebmke wrote:
Wed Oct 17, 2018 7:00 am
Once you sort out what to do with the money I would still go back and re-look at the process and the capability of your tax practitioner.

In most cases there should be no reason for a surprise refund at this late date. First, the fourth quarter payment isn't due until January 15 and for many (most?), one should be able to make a reasonable estimate of full year income to true up the estimated payments with an adjustment to the 4th quarter. Certainly by the time you file an extension, you should have a pretty good pro forma of your tax return. If your tax preparer cannot provide this level of service, I'd argue that you need to look for someone else to do this.
This.

I understand a couple of grand but if your tax preparer is off by 26k I'd find a new one.
With the facts presented, I see it differently. The taxpayer owns his own business, pays estimated taxes, and stated that 4th quarter income was less than expected. If the late-year reduction in income was not provided to the tax preparer in time to properly adjust the 4th quarter estimated payment, and it sounds to me like it wasn't, then the tax preparer is not to be blamed for the large tax overpayment.

Whether the tax return should have been completed sooner is a different issue.

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Re: What would you do with unexpected tax refund?

Post by NextMil » Wed Oct 17, 2018 8:54 am

Add me to the list of people who say make sure the cash is real then pull the trigger on option 2, then use the $255 for option 1, then use all that cash to build an emergency fund.

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Re: What would you do with unexpected tax refund?

Post by johnsac » Wed Oct 17, 2018 9:55 am

IndyAtty wrote:
Wed Oct 17, 2018 6:48 am
I would at least pay the bill for the hospital stay. Doctors/hospitals aren’t in the lending business. Your child received important services, and the health care providers should be paid for that.
I actually called and asked about paying it off in full if they'd give me a 10% discount, their response was no. Its debt that I've been paying down every month for nearly a year, and they havent even charged interest.....such a weird way to do business in my opinion.

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Re: What would you do with unexpected tax refund?

Post by johnsac » Wed Oct 17, 2018 10:00 am

MarkNYC wrote:
Wed Oct 17, 2018 8:28 am
8foot7 wrote:
Wed Oct 17, 2018 7:13 am
jebmke wrote:
Wed Oct 17, 2018 7:00 am
Once you sort out what to do with the money I would still go back and re-look at the process and the capability of your tax practitioner.

In most cases there should be no reason for a surprise refund at this late date. First, the fourth quarter payment isn't due until January 15 and for many (most?), one should be able to make a reasonable estimate of full year income to true up the estimated payments with an adjustment to the 4th quarter. Certainly by the time you file an extension, you should have a pretty good pro forma of your tax return. If your tax preparer cannot provide this level of service, I'd argue that you need to look for someone else to do this.
This.

I understand a couple of grand but if your tax preparer is off by 26k I'd find a new one.
With the facts presented, I see it differently. The taxpayer owns his own business, pays estimated taxes, and stated that 4th quarter income was less than expected. If the late-year reduction in income was not provided to the tax preparer in time to properly adjust the 4th quarter estimated payment, and it sounds to me like it wasn't, then the tax preparer is not to be blamed for the large tax overpayment.

Whether the tax return should have been completed sooner is a different issue.
This is correct - 4th quarter revenue was much lower than projected and we went off the estimates the tax preparer had made, so I dont blame them, this has never been an issue in 10+ years with the preparer. As far as completing it more quickly, thats just something we chose to do because I was focused on some other business things at the time. (I have 2 businesses so our tax situation can be a bit complicated sometimes!0

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Re: What would you do with unexpected tax refund?

Post by johnsac » Wed Oct 17, 2018 10:03 am

NextMil wrote:
Wed Oct 17, 2018 8:54 am
Add me to the list of people who say make sure the cash is real then pull the trigger on option 2, then use the $255 for option 1, then use all that cash to build an emergency fund.
I think you're right, thats the way I'm going to go. Emergency fund is already in good shape, funding retirement plans already, this refund is extra money that I can choose to deploy in the most advantageous way, which seems to be unanimous above -- getting rid of PMI.

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Re: What would you do with unexpected tax refund?

Post by jebmke » Wed Oct 17, 2018 3:52 pm

MarkNYC wrote:
Wed Oct 17, 2018 8:28 am
8foot7 wrote:
Wed Oct 17, 2018 7:13 am
jebmke wrote:
Wed Oct 17, 2018 7:00 am
Once you sort out what to do with the money I would still go back and re-look at the process and the capability of your tax practitioner.

In most cases there should be no reason for a surprise refund at this late date. First, the fourth quarter payment isn't due until January 15 and for many (most?), one should be able to make a reasonable estimate of full year income to true up the estimated payments with an adjustment to the 4th quarter. Certainly by the time you file an extension, you should have a pretty good pro forma of your tax return. If your tax preparer cannot provide this level of service, I'd argue that you need to look for someone else to do this.
This.

I understand a couple of grand but if your tax preparer is off by 26k I'd find a new one.
With the facts presented, I see it differently. The taxpayer owns his own business, pays estimated taxes, and stated that 4th quarter income was less than expected. If the late-year reduction in income was not provided to the tax preparer in time to properly adjust the 4th quarter estimated payment, and it sounds to me like it wasn't, then the tax preparer is not to be blamed for the large tax overpayment.

Whether the tax return should have been completed sooner is a different issue.
yes, there can be surprises that can't be anticipated. One year I did an unplanned DAF donation that changed my whole year. Even with three quarters of payments I still had a refund. I'd still argue that by the time you file for an extension in April, it should be really an unusual situation where a large expected refund isn't known. Sometimes there are cases where even this can occur if a late K-1 involves significant unknown deductions.
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Re: What would you do with unexpected tax refund?

Post by Luke Duke » Wed Oct 17, 2018 3:58 pm

NextMil wrote:
Wed Oct 17, 2018 8:54 am
Add me to the list of people who say make sure the cash is real then pull the trigger on option 2, then use the $255 for option 1, then use all that cash to build an emergency fund.
This.

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Re: What would you do with unexpected tax refund?

Post by celia » Wed Oct 17, 2018 4:56 pm

johnsac wrote:
Wed Oct 17, 2018 9:55 am
IndyAtty wrote:
Wed Oct 17, 2018 6:48 am
I would at least pay the bill for the hospital stay. Doctors/hospitals aren’t in the lending business. Your child received important services, and the health care providers should be paid for that.
I actually called and asked about paying it off in full if they'd give me a 10% discount, their response was no. Its debt that I've been paying down every month for nearly a year, and they havent even charged interest.....such a weird way to do business in my opinion.
OP, you appear to be a business owner. What if one of your clients owed you a lot of money but has been making minimal payments for a year now. If they called you up and offered to pay off the rest immediately if you wrote off 10% of the debt, would you agree to that?

That's the same thing you are asking the hospital. They have employees and vendors and buy equipment and maintain a building and ER and computers and a pharmacy and an in-house communication system and.... (you get the point).

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Re: What would you do with unexpected tax refund?

Post by johnsac » Fri Nov 09, 2018 3:30 pm

celia wrote:
Wed Oct 17, 2018 4:56 pm
johnsac wrote:
Wed Oct 17, 2018 9:55 am
IndyAtty wrote:
Wed Oct 17, 2018 6:48 am
I would at least pay the bill for the hospital stay. Doctors/hospitals aren’t in the lending business. Your child received important services, and the health care providers should be paid for that.
I actually called and asked about paying it off in full if they'd give me a 10% discount, their response was no. Its debt that I've been paying down every month for nearly a year, and they havent even charged interest.....such a weird way to do business in my opinion.
OP, you appear to be a business owner. What if one of your clients owed you a lot of money but has been making minimal payments for a year now. If they called you up and offered to pay off the rest immediately if you wrote off 10% of the debt, would you agree to that?

That's the same thing you are asking the hospital. They have employees and vendors and buy equipment and maintain a building and ER and computers and a pharmacy and an in-house communication system and.... (you get the point).
Absolutely, I would, much rather have 90% now then 100% over a period of years.

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Re: What would you do with unexpected tax refund?

Post by deikel » Fri Nov 09, 2018 4:46 pm

Option 2

It is a no brainer - mortgage insurance is one of the worst wasted moneys, that does absolutely nothing for you other than giving you the privilege to work even harder for the bank that owns your house at an even lower risk since you insured their risk.

And dont even get me started with the awesome return you get from eliminating the PMI (like 12% for the PMI non payment plus less mortgage payment on the 26k of I guess 4%...what investment vehicle could guarantee you 16% return ?)

Use the freed up cash flow to snow ball the other debt (highest % first), than continue with the mortgage.
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