For those home buyers that have to work a little harder to come up with the money for a down payment and closing costs — or other home investments — this is for you. Using your tax refund and stimulus on home equity can be very helpful.

It has been reported that the majority of Americans filing their taxes receive some portion of a refund, and this year is anticipated to be no different, especially with all of the loan forgiveness and tax credits offered due to economic recovery and stimulus. So if you’re one of the many Americans looking forward to tax season because you’re expecting a tax refund from Uncle Sam, get ready to leverage your tax refund in a variety of ways to either purchase a home or build more home equity.

There may be no better way to spend your tax refund this year than investing or reinvesting into homeownership.

2021 is unique because taxpayers not only have any anticipated tax refunds but also any potential saved stimulus funds to use as a 2020 tax year annual windfall. And tax season — even with its extension into mid-May — happens to fall right in the middle of the popular Spring home-buying season. 

As we’ve seen over and over in the current seller’s market, prices are rising and every little bit counts, so these funds are especially useful in this competitive season for home buyers.

Ways to Use Your Tax Refund and Stimulus on Home Equity

Down Payment 

One of the most popular ways to use a tax refund is as a down payment on a coveted home. 

If you’ve been looking to purchase, you know that most mortgage lenders require that the funds you use for your down payment be sourced and seasoned. Usually, this means personal savings, pension plan funds, investments, or assistance from relatives. You must be able to show where the money came from — for example, a bank account, savings account, or retirement fund — and that money must have been in your account for, ideally, 60 days. 

The seasoning requirement allows the lender to ensure you aren’t obtaining cash only on a short-term basis or through last-minute borrowing. But there are a few exceptions. One of these is through money paid to you from the sale of personal property that you own — and you’ll need to show receipts. Insurance awards and tax refunds are the other two ways to immediately achieve seasoned down payment funds. 

This is why a tax refund is one of the easiest ways to come up with a down payment to buy a home.

Other Purchase Fees and Closing Costs 

Earnest Money

In much the same way you need to come up with the funds for a down payment, you also need ready money to put down as earnest money when purchasing a home. This is a deposit made to a home seller showing a buyer’s good faith in completing the transaction. While the exact amount of an earnest money deposit varies, it usually ranges from 1% to 3% of the sales price of the property, so having your tax refund available for this is a boon.

Inspections 

Buyers are also responsible for paying for the examinations and reports of a real estate property’s condition. These home inspections, appraisals, and other contingency qualifications add to the costs of buying a home, and using your tax refund on your home purchase can work toward these costs. 

Closing Costs

Typically, homebuyers will pay between about 2% to 5% of the purchase price of their home in closing costs. This can be between $4,000 and $10,000 on a $200,000 home! Closing costs vary depending on where you are purchasing, but as their name implies, are the last step in closing escrow on your new home.

You do not want to find yourself at the last minute without all of the funds and fulfilled requirements to complete the sale, so your tax refund can aide in completing your home sale.

Get Your Best Interest Rate

If you are a saver and already had the funds to secure your down payment and other monetary obligations for your home purchase, use your tax refund to pay off high-interest credit card debt.  

Because your credit score is one of the most important factors that will determine your mortgage interest rate, using the funds in this way will help decrease your debt-to-income ratio and make your finances look more favorable to lenders. You’ll not only have an easier time securing a mortgage but will likely end up with a lower mortgage interest rate, which not only helps you save money and decreases the amount of your monthly mortgage payment but also increases the rate at which you build equity in your home.

Repairs

And still, after you’ve purchased your home, you know that costs will continue, even if they are just in the guise of repairs and general upkeep of your property. Using any saved money — including a tax refund — on these repair and maintenance costs is crucial to maintaining the value of your property for eventual resale.

Obviously how you choose to spend your tax return is an entirely personal decision. But if you want to put it to great use in a sustainable long-term investment, then consider using your tax return toward homeownership with a down payment, earnest money deposit, closing costs, or other home equity expenditures.