10 Ways to Use a Tax Refund for Homeownership
Many Americans look forward to the tax season because they’re expecting a tax refund from Uncle Sam. So, they keep a close eye on the deadline to submit their tax returns. Tax Day is the deadline when individual income tax returns are due to the federal government. It falls typically in mid-April, which happens to be right around the corner - April 15, 2020.
Last year, the Internal Revenue Service (IRS) sent $324 billion back to taxpayers. “Nearly 8 out of 10 received a tax refund worth an average of $2,895”, according to Business Insider. This average does vary by state but provides an idea of what to expect from the IRS.
Turning in your tax returns is just half the battle. Making the most of your tax return is the other half. And, there’s no better way to spend it than investing or reinvesting into homeownership. Both home buyers and homeowners can leverage their tax refunds in a variety of ways to either purchase a home or build more home equity.
Spread your wealth wisely with these top 10 ways to spend your tax refund for homeownership.
Purchase a home
It’s no surprise that the home buying seasons kicks off around Tax Day or early spring to be specific. The normal spring home buying season for most Americans is typically April, May, and June. Understandably, home buyers tend to scramble to save the most they can to pay for all the costs associated with purchasing a home and closing quickly, which can range from a down payment to closing costs. Every little bit counts, especially in the spring because it tends to be the most competitive season amongst home buyers.
1. Pay down debt
Your credit score is one of the more crucial factors that will determine your mortgage interest rate. One of the easiest ways to increase your credit score to buy a house is to pay off high-interest credit card debt.
2. Down payment
The down payment is the money you give to the home’s seller upfront. The rest of the payment to the seller comes from a home loan that your mortgage lender provides. Use our mortgage down payment calculator to estimate the down payment for your dream home.
Keep in mind that when you make a down payment of less than 20%, you typically have to pay private mortgage insurance (PMI). PMI protects the mortgage lender from losing money if the borrower ends up in foreclosure.
3. Earnest Money Deposit
Earnest money is a deposit made to a home seller showing a buyer’s good faith in completing the transaction. The amount of an earnest money deposit varies from city to city, but it usually ranges from 1% to 3% of the sales price of the property.
4. Home Inspections
A home inspection is an examination of a real estate property’s condition and is often paid for by a potential home buyer. This written report provides a breakdown of a property, including an assessment of necessary or recommended repairs, maintenance concerns, or other issues. “The average home inspection costs around $315, with condos and small homes under 1,000 sq ft. costing as little as $200. Larger homes over 2,000 sq ft. will run $400 or more”, reports HomeAdvisor.
Please note that a home inspection is not an appraisal, which determines the value of a property.
5. Other closing costs
There are other home buying costs outside of the ones we’ve mentioned thus far which aren’t negotiable. Learn more about these closing costs, specifically the negotiable ones, to increase your purchasing power.
6. Savings for home maintenance
Owning a home is great, but there are hidden costs when it comes to maintaining it. Go over our complete home maintenance checklist to keep your home running smoothly and account for those expenses.
Build home equity
Homeowners can build wealth by either reinvesting in their homes, refinancing their current home loans to increase cash flow, or purchasing a second home. Regardless of which path you choose, make sure it makes sense financially for your particular situation.
Most repairs are inexpensive and DIY-friendly, but sometimes they can be costly and require a handyman like installing new shingles for your roof or refinishing hardwood floors. It really depends on the difficulty of the job and your comfort level.
Renovating your home, if done right, can increase its value and make it that much more desirable to live in. The key to getting a bigger return for your investment is finding the right home improvement projects that provide the best value.
9. Refinancing costs
If you’re looking to save thousands a year, then refinancing is the way to go. You can pay off high-interest debt, lower your interest rate, drop your mortgage insurance, or shorten your home loan term. In some cases, you can even take advantage of more than one of these benefits. However, it takes money to save money and there are refinancing costs and requirements.
10. Buying a second home
Financing a second home, whether it’s an investment property or vacation home, can be a lucrative investment.
How you choose to spend your tax return is obviously entirely up to you and even getting a tax return back this year can be considered a win, but if you want to create sustainable long-term wealth then consider using your tax return towards homeownership.