5 Smart Ways You Can Use Your Tax Refund for Homeownership

IRS Commissioner Chuck Rettig told the Senate Finance Committee in June, that the IRS has processed more than 137 million individual income tax returns and issued more than 101.2 million refunds totaling $281.4 billion. Roughly 70% of taxpayers received money back in 2021 with an average refund of $2,800.

If you are expecting a refund this tax season, instead of blowing it on frivolous purchases, consider investing it in your future! What better way to do so than to put it towards your dream home?

Check out these five smart ways a tax refund can help you get closer to owning a home.

If you do not have enough money for a down payment, a tax refund may be able to assist you to meet your goals. The majority of conventional loans demand a 20% down payment. However, other financing options like an FHA mortgage or a VA loan can cost 3.5% to 10% depending on your credit score and history. For example, if you qualify for a Fannie Mae loan of $200,000 with a 3% down payment you will pay $6,000. Many people receive $6,000 or more in state and federal tax refunds. So, this can cover the entire down payment amount.

However, if you can use your tax refund and some savings to pay the standard 20% down, you probably should. You would not have to pay private mortgage insurance (PMI) and you will have greater negotiation power. You will also benefit from a lower interest rate and lesser monthly payments.

Closing fees normally range between 2% to 5% of the home’s purchase price. They can add up quickly and vary depending on where you buy your home. If you have any financial surprises throughout the closing process, you can use your tax refund to cover those fees. Closing costs often include the following:

Many of these charges are not always permitted to be rolled into your monthly mortgage payments and you may have to pay them in cash. So, your tax refund will be an excellent method to assist with these closing costs.

You can consider paying for mortgage points, also known as discount points to trim the interest rate on your loan. One percent of your mortgage amount is equal to 1 point. It is an interest payment made in advance in exchange for a lower interest rate on a fixed-rate mortgage. On a $300,000 mortgage, one point would cost $3,000.The money you pay in points may be tax-deductible and can help you to save more money in interest payments over the life of the loan. Therefore, using your tax refund to buy down your interest rate by another.125% or.25% may be a good idea.

There are several aspects for a mortgage qualification which include debt-to-income ratio, asset reserves, and payment history.

Lowering your debts such as credit cards, payday loans, auto loans, personal loans, or student loans with a tax refund is the simplest strategy to improve your credit score and debt-to-income ratio. You save hundreds of dollars every month by paying off your debts. Plus it will also help you qualify for a higher mortgage or the best interest rates. Furthermore, with fewer monthly payments, you will feel better about your budget.

The most straightforward use of a tax refund is to deposit it in a bank account. The more funds and assets you have, the less risky you are to a mortgage lender. Therefore, having a few thousand dollars in reserve will improve your chances of qualifying for a mortgage with better interest rates.

It is advisable to leave the money alone and consult with a property buying professional first. Your loan program may require you to have sufficient financial reserves as a condition of the loan. In many circumstances, you are required to have 2-6 months of PITI reserves(amount of cash you need to pay for principal, interest, taxes, and insurance after paying for a down payment and closing costs).This might make a difference between approval and denial if your approval is on the fence.

When you get a tax refund, keep in mind that you have worked hard for it, so treat yourself to a new home!

Also, keep in mind that you will be able to deduct mortgage interest and property taxes when you purchase your first house. This could lead to a bigger tax refund.

Call Ratebeat Mortgage today to learn more about our various loan options.