Using Your Tax Refund to Increase Home Equity

March 15, 2021 By ,

Tax refund season is upon us! The average tax refund in America is $2,741. That’s a lot of money you can use for your benefit.

You may be tempted to use your tax refund to buy yourself something special or go on vacation. However, one of the best ways to accelerate your savings and improve your finances is to take that refund money and invest in property—either a house you plan to buy or the home you currently own.

Down Payment

Saving for a down payment on a home can be a challenge for renters when they start the home buying process. Tax season offers an opportunity for many first-time home buyers. With an influx of cash at their disposal, many decide to use their tax refunds as a down payment option.

Whether the refund will be a couple hundred, or a few thousand dollars, using your tax refund as part of your down payment is an effective way to spend that money. 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. Owing less on your home means that you have more equity from the start, and you’ll be able to access the benefits of equity faster.

If you’re diligent, you may be able to save enough for a down payment quickly. You could even place your refund into an account dedicated to your down payment so those funds are set aside and protected. Then you’ll earn interest until you’re ready to buy. Don’t worry too much if you aren’t able to save a large amount of money. 20% down payments are a myth of the past; PacRes has many low down payment options that make getting into a home easier. You can also save that money for closing costs, due diligence payments or other associated home buying costs.

Home Improvements

Another excellent way to use your tax refund is to increase the equity in your home through home improvements. Functional or cosmetic improvements boost the value of your home, directly increasing your equity. Making cost-effective home improvements can be a great use of your tax return dollars. Take these projects, for example:

Manufactured Stone Veneer

Stone veneer is a popular alternative to brick, and buyers are looking for homes with updated exteriors. Curb appeal is important to new buyers as indicated by the recouped cost on manufactured stone.

  • Cost to Homeowner: $9,456
  • Resale Value: $10,850
  • Cost Recouped:7%

Steel Entry Door

Curb appeal isn’t the only key to attracting potential home buyers. It is also important for home buyers to know that their home is safe and secure. Installing a modern steel entry door is a simple and cost-effective way to boost your home’s security.

  • Cost to Homeowner: $1,888
  • Resale Value: $1,700
  • Cost Recouped: 90%

Garage Door Replacement

Even if you have ​no intention of moving, the garage door is the largest and most-used entry point of the home. You want to be sure that it’s in good working order. If your garage door is worn out or not opening as smoothly as it used to, consider upgrading to a new one.

  • Cost to Homeowner: $3,669
  • Resale Value: $5,296
  • Cost Recouped: 3%

Minor Kitchen Remodel

It’s common knowledge that a kitchen remodel can increase the value of a home. However, the cost and return may be different depending on the home’s location. Remodels should be consistent with the rest of the home and other homes in your area.

  • Cost to Homeowner: $23,456
  • Resale Value: $20,724
  • Cost Recouped:4%

Paying Down Your Mortgage

Another place where your tax refund can work for you is on your current mortgage. If you own a home, applying your refund as an extra payment on your mortgage is a smart way to use that cash to get your home paid off more quickly.

What is the benefit of paying off your mortgage early?  Perhaps you want to spend more on principal payments now to spend less on interest in the long run, getting out of debt faster. The sooner your home is paid off, the sooner you can use that extra cash to shore up your savings for retirement or other expenses.

Applying extra payments to your principal also increases your equity more quickly. You may want to earn more equity to invest in another property or leverage as a home equity line of credit (HELOC). Your equity can also be used to help refinance your home, allowing you to take advantage of a potentially lower interest rate. Refinancing also allows you to pay off your home even faster if you refinance into a shorter-term loan.

Be sure to direct your extra payments to the principal of your loan. If you’re not careful to dictate that your payment be applied to the principal, that extra money may end up being applied to your owed interest instead. You want to be sure that your money is working towards the goal of paying down that mortgage and growing your equity. When making your payment, be sure to let your mortgage holder (the company you send payments to every month) know that the money is specifically to be used to pay down your interest. They will earmark it and apply it properly for you.

Of course, if you need to use your refund for necessities such as transportation, healthcare or other living expenses, that’s a perfectly responsible thing to spend your money on. Home equity accrues naturally over time, so even if you can’t invest your refund in your home, know that you’re still building value just by making mortgage payments each month.

Whether you’re using your tax refund towards a new home or renovations to the home you’re in, give PacRes a call for all of your mortgage needs. Get in touch with your local branch today!

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