If you want to buy a home and need a mortgage, you need a down payment or money you pay up front toward the purchase price so you can borrow the balance to fund your property. If you are expecting a tax refund, this can be a good opportunity to finally buy. Many homebuyers choose to turn their refund into a down payment because doing so comes with a few benefits.
A Refund Is “Extra” or “Forced Savings” Money
Your tax return is the money the government sends you when you have overpaid your taxes through withholdings or pre-payments. You likely didn’t miss this money, and now you have a “bonus” you can put toward your dream.
Your Tax Refund Is a Lump Sum
Your tax return can be thousands of dollars. If you are buying a modest home or can combine your refund with savings, you may have enough to cover 3.5% or 5% or for an FHA-backed mortgage. While a 20% down payment is ideal for helping you avoid mortgage insurance fees and higher interest, many buyers, especially first-home homebuyers, rely on a smaller down payment.
It Can Help You Offset the Cost of Renting
As rents go up, it can be harder to save for a down payment, especially if your income does not keep up with the increases. With a tax refund, you can get into a house where the monthly payment may be the same or less than renting, and you can build an asset. This option, if you’re ready to buy a home, can put you in a better position than using your refund for shopping.
Your Refund May be the Most Additional Money You Receive
If you are saving every month for a down payment, your money may grow slowly. After all, you still have all your monthly bills to pay. For many people, a refund can be one of the biggest added bits of money they get. If you use your paycheck for everyday expenses, you can feel confident putting your refund in your savings or toward a down payment.
What Are the Drawbacks?
While using a tax refund as the down payment on a house is one option, it is not always the right option. If you have not been able to save and you only have your tax refund to use, you may not have enough to purchase the home you want. In addition, if you don’t have an emergency fund and added savings, you may not have the money for closing costs, maintenance, property taxes and the other costs of homeownership.
If you’re wondering whether to use your tax refund as the down payment on a house, start by evaluating whether you’re ready for ownership. If yes, then go ahead and use your tax refund to buy. If you’re not ready, consider putting your refund into a savings account and saving more. By the time the next tax season comes around, you may be a little closer to your goal!