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Using Your Tax Refund Wisely Toward Buying a Home

Using Your Tax Refund Wisely Toward Buying a Home

If you’re expecting a large tax refund this year, and you’re looking for a change of scenery, you may be thinking about using that money toward the purchase of a home.

The average tax refund for the 2019 tax year was around $2,500, according to Bankrate. It makes sense to try to work that extra cash into your home-buying plan.

Here’s what you should know if you’re planning on purchasing a home with your tax refund.

How Can I Use My Tax Refund Toward Buying a Home?

There are many costs associated with buying a home. Your tax refund could be put to good use in any of the following areas: down payment, closing costs, taxes and insurance, moving costs, and emergency funds.

Down Payment

You don’t have to make a 20% down payment to be able to buy a home. That may seem like the magic number because it’s mentioned a lot, but, in reality, the average down payment is around 5 to 10%. You might be able to put even less down with conventional and FHA loans. USDA and VA loans don’t require down payments at all.

Closing Costs

You can expect to pay around 3 to 6% of your loan amount in closing costs. These fees are typically paid as an out-of-pocket expense on signing day. However, if you don’t have enough to cover the fees upfront, you may be able to work the amount into your loan if you’re willing to accept a higher interest rate.

Taxes & Insurance

Your property taxes and homeowners insurance may be included in your monthly mortgage payment. If these costs are not escrowed into your loan, you may be required to pay property taxes that are owed through the rest of the year, as well as the first year of homeowners insurance premiums.

Moving Costs

It costs money to uproot your life. You may need to rent a moving truck or hire a crew of movers. You’ll have to box up all of your belongings, and that requires packaging material. There could be items you can’t take with you and need to put away in storage. You may have to put down deposits for utilities. You could find yourself in need of new furniture.

Emergency Funds

Once you become a homeowner, you’ll realize there are even more costs associated with owning a piece of property that go far beyond your monthly mortgage payment. Having emergency funds will allow you to take care of unexpected expenses that may pop up along the way (such as plumbing issues or roof repairs).

What Is the Fastest Way to Get My Tax Refund?

The quickest way to get your tax refund is twofold: electronic filing and direct deposit. You can track your money with a tool from the Internal Revenue Service (IRS) called Where’s My Refund? Currently, there’s a warning on the website that states COVID-19 is causing mail-processing delays. 

Whether there’s a pandemic or not, the IRS warns against relying on getting your tax refund by a certain date to make a big purchase. Sometimes, additional review is required, or special restrictions apply. For example, refunds involving Earned Income Tax Credit or Additional Child Tax Credit can’t be issued before mid-February. 

How Will Stimulus Payments Affect My Tax Refund?

The stimulus checks—also known as Economic Impact Payments—that were doled out because of the COVID-19 pandemic were not considered income. Therefore, you won’t be taxed on them and your income tax bracket will not be affected. 

You may have heard the stimulus payments were advances on your tax refund, and you won’t be getting as much money now. This is not true. The stimulus checks were linked to an advance tax credit that you will claim on your 2020 tax return. 

Put it this way: you got an early refund on a tax credit you haven’t claimed yet. Any refund you’re due when you file your 2020 tax return won’t be affected by the stimulus payments.

Using Your Tax Refund Wisely Toward Buying a Home

Now you know the best ways to go about using your tax refund to purchase a home.

The extra money could go toward your down payment, closing costs, or taxes and insurance. You could also save the cash for later when it’s time to move or an unexpected expense pops up.

If you want to sell your current home before buying another, we can make a fair cash offer and close quickly. Get in touch today! 

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