DENVER – It’s tax season and for many people, that means a refund coming their way.
It can be tempting to spend your tax refund on a vacation or a big splurge item you’ve been eyeing, but Marni McMillan with VIP Mortgage says investing that refund in housing can really pay off down the line, especially if you’re looking to buy.
“If you use your tax refund this year and get into a house, you’ll have tax write-offs that may mean a better refund next year,” McMillan said. Not only that, but you’re investing in your financial portfolio instead of throwing the money away, McMillan said.
Believe it or not, your tax refund might be just the boost you need to buy your first home. According to the IRS, the average refund in 2015 was a little over $3,000, and McMillan said that in some situations, that’s all you need.
Making a down payment
One of the biggest challenges to buying a home is coming up with the money for a down payment.
“A lot of people just feel like [home ownership] may be out of reach because there’s a lot of misconception out there that it’s really difficult to qualify [and] you need a 20 percent down payment,” McMillan said.
McMillan says that in many cases, you can probably get into a home with much less than that.
Local governments at the city, county and state level usually offer grants and other down payment assistance programs that can lower your down payment to a fraction of the purchase price.
Qualifying buyers can also take advantage of government-backed FHA loans, which have a minimum down payment of just 3.5 percent and less restrictive qualifications. Since FHA loans can be used in conjunction with other down payment assistance programs, your tax refund might end up being all you have to spend out of pocket on a down payment.
If you’re a member of the armed forces or a veteran, you might qualify for a no-down-payment VA home loan. In that case, your tax refund could go toward paying closing costs.
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Paying down other debt
Mortgage lenders often have debt-to-income ratio requirements for loans, so if you’re having trouble qualifying, you might need to pay down some of your other debt first. Whether it’s paying down student loan debt or credit cards, check with a lender to find out where it’d be most beneficial to spend your refund.
Paying down your principal
If you’re already a homeowner, you might consider using your tax refund to pay down the principal on your loan. This isn’t the most “exciting” option, but it will shorten the length of your mortgage in the long-run if you do this every year, freeing up more money for the future.
Making repairs or renovations
Another option if you already own a home is to put your tax refund toward some repairs or renovations. Updating your home can really pay off if you plan to sell the property down the line, as newer fixtures and appliances increase your home’s value and make it more appealing to buyers.