Tax season is right around the corner! If you’re wondering how to get the most out of your tax refund this year, consider investing it into buying your new home.
Think about it: buying a new home requires a lot of upfront investment. Whether your tax refund is in the hundreds or in the thousands, that money can help alleviate some of the upfront costs if you use it wisely. Here are some costs to consider when purchasing a new home, and some suggestions on how you can divide or invest the money effectively.
Use the money towards a down payment
Down payments for home purchases can range anywhere from 5% to 20% of the total purchase price, which can be a lot of money to provide upfront when considering buying. Saving your tax refund can be a great way to ensure that you have enough money to cover the down payment, without needing to dip into your savings or into your other accounts.
Use the money towards the closing costs
When purchasing a home, you are required to pay a culmination of fees towards your lender, your real estate agent, and any other third parties involved in the transaction. These fees all add up into a closing costs expense. Saving your tax refund for these closing costs can be beneficial, especially since the closing costs can range from 2% to 5% of the purchase price, and it must all be paid upfront before you can take ownership of the home.
Lower your interest rate with discount points
After purchasing a home, you will be required to pay your mortgage on a monthly basis. The interest rate on your mortgage can vary depending on the state you’re purchasing in, on which lender you’re choosing, and on your credit score. During the homebuying process, however, your lender may give you the option to purchase discount points to lower your mortgage interest rate. If your lender does not give you this option, you can ask them before the mortgage loan is approved. The discount points you purchase upfront will not only help lower your mortgage interest rate, but it will also lock that rate in place and prevent it from increasing in the future.
Pay down or pay off debt
As previously mentioned, your credit score can determine your mortgage interest rate when you’re purchasing a home. Your credit score also determines mortgage approval, the price of your down payments, and your eligibility for additional loan programs. If you have a lot of debt or you have a low credit score, you can use your tax refund to pay off high-interest loans and/or credit cards, which will consequently increase your credit score.
Home maintenance and home inspections
When buying a home, there may be additional inspections or maintenance that the previous owner does not provide or is unable to provide. Keep in mind that a standard home inspection is different from an appraisal. Appraisals determine the value of the home and are usually paid for by the seller. In contrast, an inspection determines the condition of the home and the property, which is usually paid for by the buyer. If there are any additional repairs or standard maintenance that need to be taken care of before or after the home has been purchased, putting aside your tax refund can help alleviate some of these costs.
There’s a lot of upfront and future costs to consider when purchasing a home, but if you put aside your tax refund and then compare each of the costs with what you already have saved vs. what you can put on a low-interest loan, you can use your tax refund effectively and go into the buying process confidently.
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