The home-buying season picks up just as Americans start receiving their tax returns for a good reason: applying your tax refund towards a home purchase can speed up the process and lower overall costs. (Have questions about the home-buying process? Check out our first-time home buyer guide to get started.) The following are ways to use your tax refund towards a home purchase.
Pay down debt
When lenders determine your mortgage rate, your credit score is one of the most critical factors. Use your tax return to pay down debts to improve your credit score and debt-to-income ratio.
The down payment
A down payment is an amount you pay upfront when you take out a mortgage. The higher the down payment, the lower the interest rate. Using your tax refund to boost your down payment can save you money down the road. Also, putting forward at least a 20% down payment means avoiding paying private mortgage insurance (PMI). PMI protects lenders in the case of mortgage default. Paying PMI is not ideal as it increases your monthly mortgage payment. Not sure how much mortgage you can take on? Use our handy mortgage calculator to find out.
Earnest Money Deposit
In a hot housing market, buyers need to stand apart from the competition to show sellers they’re serious about buying their homes. If you don’t want to lose out on your dream home, you can offer a seller an earnest money deposit. The amount is usually around 1-3% of the home’s asking price. The deposit is placed in an escrow account and returned to the buyer once the mortgage process is complete. Using your tax refund as an earnest money deposit is a smart way to lock in the home of your dreams.
The buyer usually pays for the home inspection of a potential house. The home inspection is a written report that assesses the condition of the property and any necessary repairs or maintenance issues. A professional must carry out the home inspection, which can cost up to $400 or more.
Purchasing a home is a costly process, with fees outside of the ones listed above. These include title insurance, property taxes, attorney fees, appraisal fees, and more. A tax return can help cover these fees and make the home buying process less intimidating.
Savings for home maintenance
Buying a home comes with many maintenance issues that can pop up at the most inconvenient times. Homebuyers can boost their confidence by depositing their tax returns into a savings account for future home repairs. Not sure how much to set aside? Experts say you should save 1% of the home’s purchase price annually for home maintenance.