How Your Tax Refund Could Help You Buy a Home

The average tax refund is higher this year, according to data from the Internal Revenue Service. Through the first few months of the year, the average refund was more than $3,400, a 13.7 percent jump over last year's average. Whether you're receiving a refund of a few hundred dollars or several thousand, if you're thinking of putting down roots, have you considered using your tax refund to buy a home?

The more money you put into your down payment, the less you'll have to borrow. This will save you money in the long run, especially if it eliminates the need for mortgage insurance. Additionally, it may entice sellers to accept your offer over competitors'. If you're looking forward to receiving a refund this year, here's how your tax refund could help you buy a home.

Using Your Tax Refund to Save for a Down Payment

Saving for a down payment can be challenging, especially if you're buying your first home. However, using your tax refund as part of your down payment is an effective use of that money. Your tax refund does not need to be sourced or seasoned, and a copy of the treasury check and a bank receipt showing the deposit is usually acceptable.

The more you are able to save for your down payment, the less you will need to take out on your mortgage when it's time to buy. However, don't worry if you aren't able to save a large amount of money. Today, the average down payment hovers around 5 to 10 percent, not 20, according to Freddie Mac. If you're wondering more specifically how your tax refund could help you buy a home, PacRes offers several mortgage options with little to no down payment, including:

• FHA Loans: 3.5% down payment minimum
• Conventional Loans (with PMI): 3% down payment minimum
• VA Loans: 100% financing
• USDA Loan*: 100% financing
• Jumbo Loan: 15% down payment minimum (with no PMI)

Additionally, if your tax refund is not quite enough for a down payment, you can also look into down payment assistance programs to help bridge the gap. Many states, county, and city governments provide financial assistance for people within their communities who are qualified and ready for homeownership. Check out down payment assistance options here.

Crunch the numbers when it comes to your house hunting price range, and ff you have questions, your local Mortgage Advisor is here to help.

Using Your Tax Refund to Pay for Closing Costs

Closing costs vary from loan to loan, but in general, the more you borrow, the higher your costs. When an offer is accepted, a homebuyer can expect to pay anywhere between 2 and 5 percent of the purchase price.

What are closing costs? When purchasing a home, your mortgage lender is required to disclose all fees that are part of the transaction. These fees are included in your loan estimate, and later, in your closing disclosure statement.

There are prepaid and non-recurring closing costs. While prepaid costs include things that you'll have to pay for regularly as a homeowner, non-recurring costs are the fees and expenses that go along with processing your mortgage. They include but are not limited to:

• Title insurance
• Title recording fees
• Fees for pulling credit
• Loan origination
• Inspection fees
• Transfer taxes
• Appraisal
• Mortgage Insurance, if applicable

The amount may also vary depending on where you live. You can use this website to see approximately where your state falls in the range of closing costs.

Lower Your Interest Rate

Did you know you can use mortgage points, also referred to as discount points, to buy down your interest rate? Mortgage points are paid upfront at closing in exchange for a reduced interest rate.

Here's how it works: when a buyer pays for points on a mortgage, they're actually paying interest upfront. The new rate will then depend on how many points are purchased. The more points purchased, the more the mortgage rate will drop.

For example: If you are borrowing $300,000, paying one discount point would mean paying $3,000 upfront at closing. This could end up saving you more in interest payments over the life of the loan.

Freddie Mac provides this website to help estimate how paying extra points could lower your rate. Not all homeowners will choose to purchase points upfront because of the option to refinance down the line. However, if you don't plan on living in your home for the full life of the loan (and rates are already low), using your tax refund to buy down your mortgage could save you money.

Build an Emergency Fund

Every homeowner should have money set aside in case of an emergency. Ideally, a homeowner should have enough emergency funds set aside to cover several months of expenses, including mortgage payments.

You could use your tax refund to create a new emergency savings account or pad an existing account. This will help protect you from financial issues if unexpected expenses arise, such as a major home repair, or in the event of a job loss or illness.

Where to keep your emergency fund. It may work in movies, but in real life? It's really not a good idea to stash money under your mattress. It's best to keep emergency savings separate from other bank accounts. You want these funds to be easily accessible, but not so easy to access that you're tempted to use them when it's not necessary.

It may make sense to build your emergency fund in a high-yield savings account, a money market account, or a traditional savings account. There are other options, each with different pros and cons.

Cover Moving Costs

No matter how smooth the home buying process, or how well you've managed your money, there's a chance you'll incur additional moving expenses. Use your tax refund to help cover costs like:

• Renting a moving truck
• Buying packing materials
• Paying utility service deposits
• Buying pizza for helpful family members and/or friends

These are just some of the many ways that your tax refund could help you buy a home. If you have questions about putting your tax refund toward your homeownership goals, or anything about the home buying process, we're here to help.