February 1st, 2015 3:16 PM by Jackie A. Graves, President
While most people dread tax time, if you are getting a refund,
this time of year can seem almost as rewarding as end-of-the-year bonus season.
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.
your tax refund as a portion of your down payment can be a great idea,” said
Clint Madison, a senior mortgage adviser with Envoy Mortgage in Walnut Creek,
CA. “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?
to the IRS, the average refund for 2013 tax returns was $3,013 as of March 24, slightly
higher than the average for 2012 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.
required down payment on a median-priced home, which the National Association
of Realtors says was $189,000 in February, would be $6,615 with an
FHA loan. If you opt for conventional financing, you would need at least $9,450
for 5% down, $18,900 for 10% down, or $37,800 for a 20% down payment.
down 20% eliminates the extra cost of mortgage insurance,” Madison said. “Even
a more modest 10% would improve negotiating power and can provide better
interest rates than a lower down payment.”
Arzaga, a certified financial planner, founder and CEO of Cornerstone Wealth
Management in San Ramon, CA, says that since tax refunds are relatively small
for most people, a refund may not be large enough to rely on as a centerpiece
for the down payment.
you’re planning a few years in advance and you view tax refunds as a forced
savings account, then saving two or three years’ worth of refunds along with
savings from monthly discretionary cash flow is a serious way to help fund the
down payment for a home purchase,” Arzaga said.
Is a Tax Refund Actually a Good Thing?
pointed out, however, that the best tax refund is no tax refund.
people view a tax refund as getting something back from the government,” Arzaga
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
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.
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.
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,” Madison said.
“Add this to the prospect of equity gained through homeownership and it’s a
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