Coming up with a down payment to buy a home is one of the biggest obstacles that people stumble on when they want to become homeowners. That’s why during tax season, many first-time homebuyers turn to their tax refunds as a down payment option.
We’re not talking huge amounts
An entry level home is generally in the $125,000 to $145,000 range. The down payment needed is 5 percent down which equates to $6,250 for a purchase price of $125,000. On a “good” year they may expect to get $3,000 from their tax returns. It is also necessary to have funds on hand to cover the closing costs. A rule of thumb is to have 1.5% of the purchase price in savings. For a purchase price of $125,000, this comes out to $1,875. So the total amount required to purchase for $125,000 is $6,250 + $1,875= $8,125.
Let’s just say the average tax refund last year was about $1,600. This can contribute to the motivation to start saving for a home but it won’t be enough to do it now.
The wisdom of using a refund this way
But is it a smart move to use your tax refund to buy a home?
It depends on whom you ask. It can make financial sense for many clients. With mortgage rates near record lows, borrowers can use their tax refund money to move to bigger homes that often carry lower monthly mortgage payments than what they pay in rent.
But the decision to buy a house shouldn’t be based on whether it’s a good time to buy.
Before you buy a home, you need to make sure that you are ready to buy a home.
When buyers rely on their tax refunds as down payment, that’s a sign they have not been able to save money on their own.
What about costly repairs?
The lack of an emergency fund is a concern, even if the buyer’s monthly mortgage payment is less than rent.
Let’s say it saves you $200 a month. But if all of a sudden you have to replace your roof and spend $5,000, it’s not cheaper anymore, is it?
What do you think? Would you use your tax refund for a down payment?