When you get your tax refund, it’s easy to dream of what to spend it on. Of course, you can treat yourself to a gift or two. However, a decent tax refund can go a long way for hopeful home buyers. Even if it doesn’t cover the entire purchase price of a new home, you can use your tax return to cover a handful of home buying fees.
Here’s a list of seven practical ways to use your tax refund to buy a home.
1. Use Your Tax Refund For A Down Payment
The average down payment on a home
for first-time home buyers is about 8% of the purchase price according to 2023 data from the National Association of REALTORS®, but down payment options can be as low as 3%. Establish your house hunting price range and compare your planned down payment to what you’re getting back in taxes. Then decide if your tax refund is best applied to your down payment.
A bigger down payment allows you to borrow less and 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.
2. Use It On Closing Costs
When you make it to the closing table, there are fees your tax return may be able to help with as well. Here are a few of the most common closing costs:
- Loan origination fee: This is charged by your lender as compensation for processing a loan application. It usually ranges from 0.5% – 1% of the loan amount.
- Home inspection: Making sure the house you’re 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’re lending you money for is worth it. They send an appraiser to do this and you foot the bill, usually around $600 – $2,000.
- Credit report: This is the cost to have your lender pull a full credit report, usually around $30.
- Private mortgage insurance: This is insurance that protects your lender. It ranges from $$8.33 – $166.67 per month for a conventional loan for every $100,000 borrowed until you build up to 20% equity in your home.
3. Buy Points
A mortgage point – sometimes called a discount point – is a fee you pay to lower your interest rate on your home purchase. One discount point costs 1% of your loan amount, and lowers your rate by a fraction of a percent decided by your lender.
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. Your lender will calculate the cost of any points and add those costs to your other closing costs. Depending on your tax refund amount, you may be able to purchase discount points to save money on interest over the life of the loan.
4. Make Necessary Repairs
If you’re planning on buying a fixer-upper, you can use your tax refund for renovations or repairs before moving in. You can also use it to fund smaller cosmetic changes like new paint and flooring. These types of projects are much easier to complete before moving in. Since you’re not living there yet, there’s likely no furniture to move out of the way. Using this money toward home updates can add value to the home, and secure a higher sale price if you decide to sell later on.
5. Fund Moving Costs
Moving costs money, even if you do have time to do it yourself. With a long-distance professional move averaging up to $8,000, a tax refund can come in handy. Your tax return will likely go further for a local move, which averages up to $1,600. No matter how far you move, your tax refund can relieve the financial burden of relocation, making moving easier.
6. Pay Off Debt
The interest rate on your mortgage and your loan terms depend on your credit score. That’s why your credit should be in good shape before you apply for a mortgage. If your score needs some work, build your credit score back up by paying off debt. If you have credit card bills or late payments, your tax refund can help pay off debt and ultimately boost your credit score. This can give you a better chance of securing a lower mortgage rate and better loan terms.
7. Keep It In Your Emergency Fund
Unexpected costs come up all the time for homeowners. If you already have your down payment and closing costs covered, consider keeping your tax refund in your savings. This way, you don’t have to stress if something needs to be replaced or repaired. When your furnace breaks or your basement floods, you’ll be thankful you set aside some money in an emergency fund.
The Bottom Line
Your tax refund can help you become a homeowner in more ways than one. You can put it toward major expenses like your down payment and closing costs. You can also cover some other fees associated with buying a home, like moving or home repairs. Or finally, you might find the best option is to set it aside to prepare for future costs of homeownership.
Once you’ve saved up enough to buy a house, start a mortgage application with Rocket Mortgage®. They’ll help you determine how much house you can afford and get you started on the buying process.
Carey Chesney
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