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Consider Using Your Tax Refund to Help Purchase a New Home

piggybank home savings paidIf you were pleasantly surprised to find you will be getting a tax refund this year, don’t spend it yet. According to the IRS, the average tax refund over the past few years has been about $3000. This is a considerable amount of money and people choose to use it in a variety of ways. Before you buy a new TV or take a vacation, think about purchasing a new home. Consider the following ways you can use your tax refund to help purchase a house. 

Improve Your Credit Score

Credit score is an important aspect of obtaining a mortgage. A good credit score will make it more likely you get the mortgage with the best possible terms. This means you will pay less over the long run as your interest rate will be lower. In some cases, a credit score improvement is necessary to be able to obtain a mortgage at all. How can you use your tax refund to improve your credit score? Pay down any high-interest revolving debt you have, such as credit cards. If you can pay them down, or even pay them off, your credit score will improve. One article indicates the boost may be 50 points or more. Make sure you don’t accumulate more credit in the meantime. Also, after you have paid off the credit card, don’t close it. Leave it open with a zero balance.  

Closing Costs

Closing costs include title insurance, inspection fees, appraisal fees, and attorney’s fees. Typically closing costs are paid for in cash. The money must be available when the mortgage documents are signed. If you do not have money saved to cover the closing costs, consider putting your tax refund into a bank account set aside for this purpose. 

Down payment

Apply your tax refund to your down payment. Even if you already have enough money saved up for a down payment, it can be helpful to put down more. The more you pay as a down payment, the less money you have to borrow which results in a reduced amount of interest paid over the life of the mortgage. Also, people who put down 20% do not have to pay mortgage insurance.  

Home Expenses

When you buy a new home, you will face expenses that you did not face as a renter. You will need to pay for property taxes and homeowner’s insurance. In addition, you may need to make purchases for your new home, such as furniture. Therefore, consider putting your tax refund in a bank account intended for saving for these expenses.  

Prepare for Emergencies

If you already have excellent credit and have saved money for closing costs, the down payment and new home expenses, you may decide buying a new TV is the way to spend your tax refund. Before you do, consider creating an emergency fund. As a homeowner you will be responsible for fixing any broken appliances. With a new home, that may not be a problem for years. However, it is best to have the money saved so that when a major expense is needed, you don’t need to worry. An emergency fund can also be used to continue making mortgage payments if you lose your job. It can cover a major car repair. Families often turn to their emergency fund if they face unexpected medical issues. Therefore, putting your tax refund aside in an emergency fund may be a better choice than purchasing a new TV. A recent article recommends that you should have enough money saved to cover three months of expenses. 

Make your dream a reality and invest in your future with a new home purchase. For additional information about buying a new home, contact us.