It’s tax season, and you know what that means: a hefty refund could be just around the corner.
What will you use it on? A shopping spree? A much-needed vacation? New clothes or shoes?
If buying a home is anywhere on your radar, you might want to think again. Earmarking that refund for your home purchase (or for your property shortly after that) may help you reach your goals sooner, pay less in interest, or even shorten your loan term over time.
Are you expecting a decent tax refund this year? Here’s how you can best leverage that cash as a hopeful first-time homebuyer:
Put it toward your down payment.
Your first option is to put that refund toward your down payment. Add it to an interest-earning savings account, and watch your balance grow at an even faster rate (meaning a possibly sooner-than-expected purchase!)
A bigger down payment also means a lower loan balance and a lower, more affordable monthly payment. It could also help you avoid private mortgage insurance (yet another monthly cost) or even lower the mortgage rate you’re offered, which means less paid in interest over the course of your loan. No matter how you slice it, putting your tax refund toward your down payment can mean big savings.
Pay points up front.
In a rising rate environment, paying points can be a great way to lower the interest rate on your loan. If you can use your tax refund to pay at least 1 to 2 percent of your loan balance up front (called paying points), you may be able to lower your rate significantly. That means less interest paid every month (i.e. a lower payment) and, most importantly, less spent over time.
Pay off debts.
Your credit score plays a big role in what mortgage rates you qualify for (as well as what loan products in general). Don’t have perfect credit? Your tax refund could help improve it. Use the refund to pay down existing debts, like credit cards, auto loans, and student loan debts. Make sure to start with the higher interest ones first, as this will free up more cash to pay down the other balances. Once you’ve paid down some debts and your score has adjusted, you might qualify for a better interest rate on your mortgage loan.
Make an extra mortgage payment.
Once you’ve bought the home, use your refund to make an extra mortgage payment — or even two, if possible. Extra payments lower your loan balance, as well as the interest you pay over the course of the loan. They could even help you pay off your loan sooner, as long as you can commit to an extra payment or two every year.
Put it toward renovations.
Not finding the perfect home? Then consider a fixer-upper instead. Your tax refund could help cover renovations and updates, allowing you to customize your dream home exactly as you see fit. Just make sure you get the home inspected first. This will allow you to anticipate any big-picture (and big-ticket) repairs that might be needed.
Use it for moving costs.
Homebuyers are always thinking of their purchase costs — the listing price, their agent’s commission, the closing costs, and more. But what they often fail to consider? The costs of actually moving into the home. Moving can be expensive — particularly in the busy spring and summer seasons. There are vans to rent, movers to book, boxes and packing supplies to buy, and a whole slew of other costs and expenses. If you’re moving from afar, travel can get costly as well. Your tax refund can put a dent in these costs — or maybe even pay for them entirely.
Spend it on new furniture and decor.
Are you buying a home much bigger than your existing rental or apartment? Then you’ll probably need new furniture, decor, and other supplies as well — all of which can get pricey, especially when purchased simultaneously. Consider using your tax refund toward these costs, and give yourself some freedom when it comes time to outfitting your new home.
Start a rainy day fund.
Finally, you can simply stow your refund away for a rainy day. As a homeowner, you never know when an appliance might need replacing or a system needs repairing. Having a rainy day fund can help you cover these unexpected costs without eating into your cash flow or hurting your finances too much. It’s also important in the event your property taxes go up or some other unforeseen expense arises.
Get Personalized Advice
Are you hoping to become a first-time homebuyer this year? Then get in touch with an Embrace loan officer today. We’ll advise you how to best use that refund to meet your home buying goals sooner and more affordably.