Using Your Tax Return For A Down Payment

Tax time is here! Time to get all those documents and calculations together to submit to Uncle Sam - meh. But it’s also time to think about what to spend that tax return on - yay!

Before you start shopping for hot tubs and boats, consider a more practical approach by putting that cash toward your new house. Let’s look at some ways you can turn your tax return into your new dream home.

There are a lot of factors that go into figuring out how much money you need to buy a house and the down payment is one of the most important.

The average down payment on a home is about six percent of the purchase price, but down payment options that may be available to you can be as low as three percent. Crunch the numbers when it comes to your house hunting price range, down payment amounts and what you are getting back in taxes. Then see how those numbers match up.

Putting more in for a down payment allows you to borrow less when it comes to your loan and it strengthens your position when you put in an offer on a home. The more you put down, the more likely the sellers are to accept your offer over others. This is especially important in a seller’s market, which we are in the midst of right now.

When you do get an offer accepted and make it all the way to the closing table, there are some additional costs you need to be aware of that your tax return may be able to help with as well. Here are a few of the most common closing costs when it comes to buying a house.

• Down Payment - The part of the purchase price that you pay out-of-pocket (as opposed to borrowing).
• Loan Origination Fee - This is charged by your lender as compensation for processing a loan application. It usually ranges from 0.5 to 1 percent of the loan amount.
• Home Inspection - Making sure the house you are potentially purchasing is free of major issues is critical. Inspection costs are in the $200 - $500 range.
• Appraisal - Your lender needs to make sure the home they are lending you money for is worth it. They send an appraiser to do this and you foot the bill, usually around $300 to $500.
• Credit Report - The cost to have your lender pull a full credit report, usually around $30.
• Private Mortgage Insurance Premium - This is insurance that protects your lender, not you, and it ranges from 0.55% to 2.25% of the original loan amount per year for a conventional loan.

Buying points may be a good option when it comes to putting that tax return to work. But what does that mean?

A mortgage point – sometimes called a discount point – is a fee you pay to lower your interest rate on your home purchase or refinance. One discount point costs 1% of your loan amount.

For example, if you take out a mortgage for $100,000, one point will cost you $1,000. For a $200,000 loan, a point costs $2,000. Points are paid for at closing and your lender will calculate the cost of any points you agree to purchase and add those costs to your other closing costs.

Putting off repairing that leak in the basement or attic? Been awhile since the furnace was serviced? Tired of tripping over that crack in the deck? These may not seem like the most fun ways to invest in your home but using that tax return on repairs will give you peace of mind whether you are just looking to enjoy your time in the house or want to make sure you get the most value when you are ready to sell it.

Unexpected costs come up all the time. If you already have your down payment and closing costs covered, consider keeping your tax refund in your savings so you don’t have to stress if something needs to be replaced or repaired. Life happens, and a little rainy day fund never hurt anyone. Not having that fund? Well, that can definitely hurt.

Now that you know some sound strategies for putting that tax return to work for your home search, check out Rocket Mortgage and get started on your home ownership journey!