Green tax refund?

Last week, I finished our taxes. Unlike previous years, I didn’t use an accountant, so I was actually able to see how different choices we made affected our taxes. The biggest thing (apart from the Saver’s Credit, which I love) this year was buying a house. Thanks to the economic downturn, we’ll get a $7500 interest free loan, re-payable over 15 years. We don’t have the money yet, but we’re trying to decide what we should do with it.

The frugal thing to do would be to dump it all in CDs and collect the interest while we pay back the principal. Over 15 years, that would make us about $2,000 (assuming an average return of 3%). That’s about $130 extra dollars a year. That’s not bad, but I don’t think $130 a year is going to make us much happier. And besides, a CD ladder is pretty boring.

Maggie is pushing hard for a hot tub, but as fun as that would be, it’s expensive and would increase our water and power needs. On the other hand, if we got a solar water system, we could put the excess in a hot tub. Which brings us to…

A solar water system. We could get a PV system, but even with the 30% federal rebate, it’s just not cost effective. A simple solar hot water system is cheaper and simpler. We’d still have to do some serious plumbing and we might have to add support to the roof, but we’re definitely thinking hard about this option.

Instead of blowing the money all on one thing, we could split it among multiple projects. After the energy audit, the most obvious thing to do is improve the insulation in our attic and crawlspace. Insulating the attic would probably cost about $1500. To recoup that expense, we only have to save about $9 a month over the course of the loan, which is quite likely.

A more fun option would be an electric (or gas) scooter. The ones we’ve looked at cost between $800 (for a cheap gas scooter) and $2500 (for a good electric scooter). They could save us a lot of money if we got rid of the car, but I don’t think we can do that at the moment. Apart from the initial cost, I think they’d break even. The additional cost of insuring and licensing would be offset by the gas savings from using the car less. Unfortunately, there’s still that loan payback to consider…

Something that caught our eye during our shoemaking experience was Glen’s solar air heater. It was basically an inclined box about 6′ tall that was covered in glass and full of tin cans painted black. A tube at the bottom was connected to the house to get cool air into the box and a tube at the top allowed hot air back into the house. They’re relatively cheap to build and could reduce our winter heating costs considerably. This is another strong contender, although I’m not sure where we’ll put it. We might try it out on the shed or garage first just to make sure it’s a good idea.

A smaller project would be to set up beekeeping in the backyard. It’s not that expensive, although there won’t be huge savings either. Our biggest concern is that it would be a time sink, and we both feel pretty busy already.

We could also use it for house maintenance. The roof will need reshingling in the next year or two and our water heater desperately needs replacing. I’m sure that more things will go wrong as time goes on. Maybe it would be smartest to set all of it aside for household emergencies.

Are we forgetting anything? What would you do with a $7500 loan?

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9 Responses so far »

  1. 1

    Andy said,

    April 2, 2009 @ 7:55 am

    It’s great that you qualified for the housing credit! You certainly have a lot off ideas! Here are some of my thoughts on them.

    CDs: These are pretty low right now and probably not worth it. My bank is offering 1.25% CDs right now even for longer terms, which would yield less money than just walking around picking up change. Luckily I put $5k in when the rate was still 4.5%, but even that will only make around $300 in the 1.5 year term. CDs do make money, but not much, and not right now. Especially during a slow economy, putting money into “stuff” (assuming its needed and useful) is much more valuable.

    Hot tub: Sounds fun, but will come with higher utility bills. As much as I love hot tubs, everyone I know who owns one tends to use it rarely, but is paying to maintain it all the time. I would rather spend the money on traveling once than maintaining a hot tub!

    Solar water system: Awesome idea, and one of the best investments you can make. These are about 4x more efficient than solar electric since heating with electricity or even gas takes a lot of energy. There may be state/federal credits for this too, you can look this up at http://www.dsireusa.org/

    Insulation in the attic: Another great idea, although less fun than the water system. You reap the benefits forever though, and would likely save thousand of $ while also using significantly less energy over the long term. Sometimes there are additional credits for these projects too.

    Electric (or gas) scooter: This is like the hot tub in my view. I talked with many people that have had scooters/mopeds but they never got to the point of relying solely on that and ditching the car. They have limitations such as steep hills and speed, depending on how much you pay for one. There is still costs for gas, maintenance, insurance, etc. and you won’t want to use it under about 50F (think windchill!) or in any sort of rain. For the first year of college, I only had a moped which was great for me, but I also didn’t have a commute or real places I needed to be. They are certainly fun, but it’s probably a lofty goal to think this could replace a car or save money in the long run. I’ve never known anyone who often used their scooter beyond the first year either.

    Solar air heater: Neat idea! I made one of these once, and learned that unless it is set up in the right spot, it won’t do much. It needs a large surface area directly where the sun is shining to work. This is certainly a fun and cheap project if you have the time and a good location for it though.

    Beekeeping: I see this mainly as a hobby and not so much as an investment or money saver. It would take a looooong time to “payback” in terms of honey 😀

    The one that seems missing is just paying off the house. Unless you bought it out right, I’m assuming you are paying over time for the house. If you have this $7500 essentially free for 15 years, why not just sink that into the house first thing in full to reduce how long you will take to pay off the house. My student loans were no small sum of money, but I’m paying them off in one year instead of 10, which will save me about $7000 from interest. It may not be thrilling now, but that’s a huge sum of money that I’m thankful that I won’t be paying!

  2. 2

    ruchi aka arduous said,

    April 2, 2009 @ 8:03 am

    I think the solar water heater is an awesome idea.

    If you decide to save the money I think you might get a better rate just getting a simple savings account with ING than a CD. And that way your money is always accessible if you need it.

  3. 3

    Emily said,

    April 2, 2009 @ 10:11 am

    A greenhouse!

    Or pay off higher-interest loans, if you have any (including your mortgage…)

  4. 4

    Andy said,

    April 3, 2009 @ 12:16 am

    Ruchi, ING was great but over the past year interest rates plummeted. They currently offer 1.5% which is better than nothing I guess, but if there’s any loans to be paid off, doing that would save much more money than gaining interest from a savings account.

  5. 5

    Will said,

    April 3, 2009 @ 2:31 pm

    We have most of our short-term savings in ING already (our credit union has rates of 0.25% unless you have lots of money). We could get a CD for 2.5% right now and I’m guessing that those rates will rise over the next several years. For my calculations, I assume an average annualized return of 3%, which is probably understating it.

    Emily: Maggie is also very interested in putting a greenhouse on the front (south side) of the house. We’re having trouble figuring out how best to design it, though. We don’t want it to heat the house in the summer and aren’t sure that we want to have to go through the greenhouse to get into the main house. We’re definitely thinking about it, but it’s a long-term project.

    Andy: Unfortunately, IN doesn’t have any rebates for residential solar systems (heating or PV), although it does have rebates for traditional water heating systems as long as they’re high-efficiency. That just increases the difference in start-up cost between putting in a natural gas water heater and a solar water heater system, though.

    We don’t have any debt aside from the mortgage, but I hadn’t thought about using the money to pay off part of it. It’s the same amount as we were paying in rent, so I still think of it as a rental fee instead of a loan payment. My biggest concern about putting the credit towards the loan is that all of the loan savings happen at the end of the loan. We’d be paying $7500 in today’s dollars to eliminate our monthly payment in 25 years.

    Still, it’s worth running the numbers. I’ll do that and get back to you all when I can write about it coherently.

  6. 6

    Emily said,

    April 3, 2009 @ 3:29 pm

    If you attach a greenhouse to the front (south) side of the house, it could have a solid roof on the back 1/3 to effectively shade the front of the house. Blocking the sunlight would have more of a cooling effect than the radiative heating you’d get from the greenhouse’s heat. You will, of course, have to vent the greenhouse properly (and maybe use shade netting) so you don’t kill everything in it, and that will also help keep it from overheating the house in the summer. When the sun is lower in the winter, it will sneak under the eaves and you’ll still get some solar gain.

    Re: using the loan on your mortgage: If you have a 30-year mortgage with a $135K balance @ 6%, and you pay a $3000 lump sum right now, you’ll cut almost 2 years of payments and save over $14,000 in interest.

  7. 7

    Will said,

    April 3, 2009 @ 11:15 pm

    It can definitely be done, but it requires much more planning than the other projects we’ve listed. We don’t want to force guests to come inside through a sauna of a greenhouse!

    Regarding the loan, it’s true that paying $3,000 now would save $14,000 later. The problem is inflation. In 2009 dollars (assuming a 3% rate of inflation), it’d only save about $8,000 (it would be only $5,600, but not all of the payments happen at the end).

    In our case, our interest rate is lower (and will go even lower if we manage to refinance) and our total mortgage is lower. This makes the numbers even worse (4.5% is 50% more than inflation while 6% is 100% more than inflation, so reducing your rate by 25% (1.5 points) reduces your after-inflation cost by 50%!). We’d save a little over $11,000 (in 2009 dollars) in interest if we put $7,500 in now. That’s a return of only $3,700, which isn’t great, especially since we don’t see any of the payoff until year 25.

    The other issue is the future discount cost. I expect that Maggie and I will have more money in 25 years than we do now, so we’ll value $11,000 less then than we do now. It’s hard to figure out exactly how much less, but my guess is less than $7,500.

    Since we’re not struggling to pay our mortgage, it probably doesn’t even make sense to try and refinance with $7,500 less on our mortgage (which would save $9,500 and reduce our monthly cost by $40). Better to put that money towards something that will appreciate in value.

  8. 8

    Andy said,

    April 6, 2009 @ 6:41 pm

    Loans are just one thing I don’t understand I guess. If someone has the means to pay off a loan in 5 or 10 years instead of 25 without making unreasonable sacrifices, then why not? With something as expensive as a house, it would mean saving tens of thousands of dollars, right?

  9. 9

    Will said,

    April 6, 2009 @ 7:24 pm

    The short answer is that we have better things to do with the money. To flip your question around, if we can pay our mortgage payments without sacrificing, why not keep doing it?

    A mortgage is also a little different from most loans. If you pay down the balance on a credit card, then your payment next month (and every month after) decreases. If you pay towards the principal in a mortgage, it doesn’t decrease your monthly payments. Instead, it reduces the length of the loan. This means that you don’t see any savings for many years.

    The $7500 we have would reduce our loan length by 5 years or so. That means that it won’t save us ANY money until 2034. And even then, because of inflation our savings will be worth less than the equivalent amount saved now.

    On the other hand, let’s say that we use the money to build solar air and water heaters that save us (a conservative) $60 a month. Over 30 years, this saves us $21,000 ($7500 towards the mortgage would save us between $22,000 and $29,000 in the same time frame, depending on our rate).

    That doesn’t seem as good except that the mortgage saving is in 2034 dollars while the utility savings are in 2009 dollars (since we’re reducing our reliance on gas and electricity costs that increase with inflation). In 2034 dollars, we’d be saving about $42,000. We’re also reducing our monthly costs immediately rather than having a windfall in 25 years–which gives us more flexbility.

    Now, if you think that inflation is going to be low or that the cost of electricity and gas will increase slower than inflation, then you might want to pay down your mortgage. I think the exact opposite is true, so I’m much more interested in reducing those increasing reccurent costs than the fixed cost of my mortgage.

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