Why Tax Season Is the Best Time to Buy a House
If you’re fortunate enough to get a refund this tax season, you might have big plans for your money. Some people plan vacations, shopping sprees, or use this money to beef up their savings account. But these aren’t the only uses for a refund.
Getting a tax refund is also a good excuse to move forward with a home purchase. Some home loan experts predict mortgage rates could increase to 5% by the end of 2019. So if you want a low rate, you may want to act quickly.
Here’s why tax season is a perfect time to buy a house.
1. A tax refund adds to your down payment fund
Unless you qualify for a VA or USDA home loan, you’ll likely need a down payment for a home purchase. Down payments typically range from 3% to 10%, but there’s always the option to put down 20% or more.
If you lack sufficient funding for a down payment, getting a sizable tax refund might help you hit your down payment goals. And if you have enough in your down payment fund, use your tax refund to pay closing costs such as attorney fees, title search fees, etc. A tax refund can also cover the cost of discount points which help buy down your mortgage rate.
2. Pay off credit cards and other debt
The higher your credit score, the easier it’ll be to get approved for a mortgage loan and get a low mortgage rate.
Different factors play a role in your credit score, such as your payment history and how much you owe. If you already have a good payment history, you can possibly add points to your credit score by reducing the amount you owe on your credit cards.
Too much credit card debt raises your credit utilization ratio and hurts your credit score. As a general rule of thumb, your total outstanding credit card balances should not exceed 30% of your credit limit.
If you’re carrying too much debt, use your tax refund to wipe out or pay down these balances. This helps improve your credit score, plus paying off debt frees up cash that you can allocate toward your mortgage payment.
3. Put it towards your current home
A tax refund also comes in handy when selling a home before buying a new one. Unexpected expenses can pop up when preparing to sell a home. If the homebuyer requests a home inspection, the inspector may uncover several items that need repairing. A tax refund can help soften this financial blow and keep the home sale on track.
Or, use funds from a tax refund to make your property more attractive to buyers. With the extra cash, you might be able to afford incentives or concessions like contributing to a buyer’s closing costs.
Then again, maybe you don’t want to move. If current mortgage rates are lower than the rate you’re paying, put your tax refund toward refinancing your mortgage loan. Refinancing creates a new mortgage and can result in better home loan terms. Refinancing does have associated costs and involves getting approved for a new mortgage (meaning you'll pay closing costs again).
Refinancing isn't only useful for getting a lower mortgage rate, though. It's also a good idea for converting an FHA home loan to a conventional home loan with the purpose of removing mortgage insurance (once you have 20% equity). Some homeowners also refinance to switch from an adjustable-rate mortgage to a fixed-rate mortgage.
Finally, there's the option of putting a tax refund toward home improvements. Home updates that offer the biggest bang for your buck include kitchen and bathroom remodeling projects, room additions, new windows, and updated landscaping.
Before spending your tax refund on another gadget or electronics, consider how to invest this money in your future. Buying a property and refinancing an existing mortgage can be costly, but your tax refund might provide the cash you need. Give the loan experts at Cherry Creek Mortgage a call today to learn about our various home loan solutions.