How to Use Your Tax Refund to Buy or Refinance Your Home

Tax refunds offer a unique opportunity to make a meaningful financial impact. With the average tax refund in 2023 standing at $2,753, many people wonder how to best use this extra cash. One strategic option is to put your tax refund toward homeownership or refinancing.

What is unique about your tax refund compared to other “deposits” in your bank account is that a tax refund can be deposited one day and used to qualify for a mortgage the next day.  Other deposits must be sourced (where they came from) and seasoned (in your account for 60 days).  Tax refunds are considered sourced and seasoned the day you receive it.

Whether you’re saving for a down payment, covering closing costs, or improving your financial standing, your tax refund can be a stepping stone to achieving your real estate goals.

Consult the Experts Before Making a Decision

Before diving into how to use your tax refund, it’s crucial to seek professional advice. Making informed decisions ensures you maximize the benefits of your refund without unintended consequences.

• Consult a CPA (Certified Public Accountant):
  • Verify that your planned use of the refund complies with tax laws.
  • Understand potential deductions or credits available for homeowners or homebuyers.
• Work with a Loan Officer at Be My Neighbor Mortgage:
  • Review your financial situation to determine the best use of your refund.
  • Explore mortgage options and down payment assistance programs tailored to your needs.
  • Get personalized advice to align your refund with your homeownership or refinancing goals.

How Your Tax Refund Can Support Your Home Purchase

Contributing to a Down Payment

One of the most common ways to use a tax refund is to boost your down payment savings. Even a modest amount can make a significant difference by reducing the loan amount and monthly payments.

Benefits of a Larger Down Payment:

• Lower Interest Rates: Many lenders offer better rates for larger down payments.
• Avoid PMI: A down payment of at least 20% lets you avoid private mortgage insurance (PMI).
• Smoother Pre-Approval Process: A larger down payment strengthens your financial profile, making it easier to secure pre-approval.

Covering Closing Costs

Closing costs can be a substantial expense when buying a home. These include fees for attorneys, appraisals, title insurance, and escrow services. Your tax refund can offset these costs, easing the financial burden during the closing process.

Starting a Dedicated Savings Account

If you’re still saving for a home, consider using your tax refund to open a high-yield savings account dedicated to your down payment. This strategy helps you stay organized while earning interest on your savings.

Paying Down Debt

Reducing high-interest debt is another smart way to use your tax refund. Paying off credit card balances or loans can improve your credit score and lower your debt-to-income ratio, both of which are critical for securing favorable mortgage terms.

Building an Emergency Fund

Homeownership comes with unexpected expenses, from maintenance costs to emergency repairs. Use your tax refund to establish or grow an emergency fund, giving you peace of mind and financial flexibility.

Tax Deductions for New Homeowners

If you buy a home in 2024, your settlement statement (HUD-1 or Closing Disclosure) may allow you to claim tax deductions. Potential deductions include:

• Mortgage Points: Prepaid points to lower your interest rate.
• Property Taxes: Taxes paid at closing.
• Mortgage Interest: Deductible for the portion of the year you owned the home.

Pro Tip: Consult a tax professional to determine your eligibility and ensure you properly document deductions.

Refinancing Your Current Home with Your Tax Refund

Lowering Your Principal

A lump-sum payment toward your principal balance can save you thousands in interest over the life of your loan. This strategy shortens your loan term and builds equity faster.

Covering Refinancing Costs

Refinancing your mortgage typically involves fees like closing costs, appraisal fees, and title insurance. Using your tax refund to cover these expenses can make refinancing more affordable, allowing you to:

• Lower your interest rate.
• Shorten your loan term.
• Remove PMI from your payments.

Is Refinancing Right for You?

Refinancing can be a great option if:

• Interest rates have dropped since you took out your mortgage.
• Your credit score has improved.
• You’ve paid down significant debt, reducing your debt-to-income ratio.

Planning for Your Tax Refund

Set Clear Goals

Define your homeownership or refinancing objectives. Knowing how much you need and by when helps you stay focused and motivated.

Adjust Your Budget

A tax refund is a great opportunity to revisit your budget. Identify areas where you can cut back to contribute more toward your down payment or emergency fund.

Track Your Progress

Use financial tools or apps to monitor your savings and milestones. Seeing your progress in real time keeps you on track and motivated.

Maximizing Your Financial Potential

Investing for the Long Term

If you’re not planning to buy a home immediately, consider investing your tax refund to grow it over time. Be sure to consult with a financial advisor to ensure this aligns with your timeline and risk tolerance.

Boosting Next Year’s Refund

Maximize future refunds with homeowner tax credits and deductions:

• Mortgage Credit Certificates (MCCs): Allow you to claim a portion of annual mortgage interest as a tax credit.
• Home Office Deduction: Deduct expenses related to using part of your home exclusively for work.
• Property Tax and Mortgage Interest Deductions: Reduce your taxable income based on payments made.

Conclusion

Your tax refund can be a powerful tool for achieving your homeownership dreams or refinancing goals. Whether you use it for a down payment, closing costs, or financial planning, consulting with professionals ensures you’re making the most of this opportunity. Ready to take the next step? Contact a loan officer at Be My Neighbor Mortgage today to explore your options and turn your refund into an investment in your future.