While most people dread tax time, if you are getting a refund, this time of year can seem almost as rewarding as mid-year bonus season.
Whether you are receiving a refund of a few hundred dollars or several thousand dollars, if you’re contemplating buying your first home, you may want to deposit your refund into an account dedicated to your down payment fund.
Using your tax refund as a portion of your down payment can be a great idea…The more you put into the down payment, the less you have to borrow.
How Much Will You Get, and How Much Do You Need?
According to the IRS, the average refund was $3,013 as of March 24, slightly higher than the average for past tax returns. A tax refund of $3,000 can go a long way to a down payment on a home, particularly if you’re using an FHA-insured loan to finance the purchase since you would need just 3.5% of the home price for the down payment.
The required down payment on a median-priced home in Las Vegas, which the National Association of Realtors says was $202,300, would be $7,080 with an FHA loan. If you opt for conventional financing, you would need at least $10,115 for 5% down, $20,230 for 10% down, or $40,460 for a 20% down payment.
Is a Tax Refund Actually a Good Thing?
A CFP points out, however, that the best tax refund is no tax refund.
“Most people view a tax refund as getting something back from the government,” CFP said. “Emotionally, it feels good. But practically, the taxpayer is getting the worse part of the deal by having the government give back the excess payment with no interest payment. The time value of money and the power of compounding make collecting the additional income and saving over time in an interest-bearing account a better deal.”
Other Uses for Your Refund
You may be tempted to use your tax refund for a splurge, but one of the best ways to accelerate your savings and improve your finances is to take “found money”—such as a tax refund or an unexpected bonus—and put it directly into your savings or to pay off debt. Before you do anything else with your refund, make sure you have at least a minimal emergency fund to cover your expenses for a few months or to pay an unanticipated bill.
If you have an emergency fund in place, then putting hundreds or thousands of dollars into a fund for your down payment, closing costs and cash reserves for home maintenance can be a great way to put you on the fast track to homeownership.
First-time buyers will realize an even bigger tax refund in the next year because they’ll have a new write-off in the interest paid on their mortgage… Add this to the prospect of equity gained through homeownership and it’s a win-win.”
To see how far your tax refund will stretch and how much home you qualify for, call us!
The Beach-Greco Team