Should I Use My Tax Refund as a Down Payment?

Should I Use My Tax Refund as a Down Payment?

Put that extra cash toward your future.

Tax return season is upon us. As checks come in the mail, renters have the chance to put those extra earnings toward something more than clothes or food. But let’s face it: coming up with that daunting 20% down payment isn’t easy. In fact, saving for a down payment on a home is one of the biggest obstacles that renters face in the transition to homeownership. This year, consider taking your tax refund and putting it toward a down payment, like many other first-time home buyers do.

ANY AMOUNT HELPS

If you’re a renter looking to become a homeowner, it’s critically important to have accurate expectations. That means understanding that your tax refund probably won’t be the entire 20% down payment you’d like to provide. It will likely be much lower than that, depending on your situation. In fact, the IRS states that the average tax refund in 2016 was $2,860.

Good news for many first-time buyers is that borrowers who qualify for an FHA loan will only have to provide 3.5% and those who qualify for a fixed-rate Conventional loan may only need to put down 5%, through Cardinal Financial. In February 2017, the median U.S. home price was $228,400, requiring a down payment of only about $8,000 for an FHA loan and $11,420 for a fixed-rate Conventional loan. These estimations just go to show that any amount you receive as a tax refund can be a substantial contribution to a down payment on a home, even if it doesn’t cover the entire cost.

IS IT A SMART MOVE?

There is wisdom in using your tax return money in this way, but it truly depends on the borrower. While mortgage rates are still historically low, borrowers have the opportunity to use their tax refund and move onto bigger and better homes that might have monthly mortgage payments that are lower than what they’re currently paying in rent.

However, the decision to purchase a home shouldn’t be based on whether the market is good for buying. That may be a factor in your consideration, but before you buy a home, you should make sure that you’re ready to buy a home. It’s as simple as that.

If you are relying solely on your tax refund as down payment money, that could be a sign that you haven’t been able to save any money on your own. In actuality, the only reason why you’ve come upon this extra cash is because you overpaid in taxes last year. If you haven’t been able to save for a down payment, there’s a chance you also have revolving debt and lack an emergency fund. When you apply for a mortgage, you have to prove that you’ll be able to sustain many monthly payments into the future, and if your tax refund is your primary source of down payment money, you may not be able to swing that.

While these are important factors to keep in mind, don’t forget about random repairs. Once the house is yours, your mortgage may truly be cheaper than what you were paying in rent—which is great. However, there are many extra costs of homeownership that can pop up or be forgotten. For example, you may be saving $200 a month to own, but during your first year you may have to cough up $4,000 to replace your HVAC unit. There are some things you just can’t predict.

YOU DECIDE

How will you use your tax refund this year? If you’re thinking about putting that money toward a down payment, call us and ask one of our Loan Originators if homeownership is possible for you right now.