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3 Smart Ways to Spend Your Tax Refund

January 18, 2019

Before you think about how to use tax refund wisely, consider what’s at stake. Data released by the Internal Revenue Service (IRS) shows that it received more than 135 million returns in 2017. It ended up processing more than 128 million of these returns. The total amount refunded stood at over $268 billion, and the individual average refund was $2,932.

What you do with your tax refund is your prerogative, no doubt. However, among the best uses for tax refunds is to use the money to fulfill your dream of becoming a homeowner or paying your mortgage off ahead of time.

Buy a New House

While the housing crisis of 2006-2009 left a telling effect and resulted in a significant dip in mortgage originations, the last couple of years have shown signs of revival. For instance, while $1.4 trillion worth of new mortgages were issued in 2008, the number crossed the $2 trillion mark in 2016 – for the first time since the recession. One of the smart ways to spend your tax refund, as a result, is to use it for buying a new home.

If you have thought about buying a new home, your tax refund may give you an easy way to get the ball rolling. What also helps is that you no longer need to pay a steep deposit to get your first home loan. The median American home buyer puts down 5% of the property’s price as a down payment. Until a around decade ago, you would have to put down at least 20%.

Consider this – you wish to purchase a home that costs $100,000 and you need to pay 5% as down payment. That amounts to $5,000. You may, of course, pay a higher down payment if you can afford it as it will help lower your interest rate, or you could put as little as 3% down if you qualify for a Fannie Mae Home Ready loan.

Reduce Your Mortgage’s Existing Principal Payment

If you have an existing mortgage and are wondering how to use your tax refund wisely, consider using the money to bring down the principal amount that you owe. When you make extra payments toward the principal amount, you work in getting rid of your debt faster. Even if you make as little as one additional payment toward the principal each year, you can reduce the loan term by five to seven years!

In addition, the quicker you build equity in your home, the sooner you may be able to stop paying for private mortgage insurance. What you need to consider, though, is if there are any prepayment penalties you might need to pay.

Refinance Your Mortgage

Home loan interest rates in the United Stated hovered between 3.9% and 4% from August 2017 to January 2018. Since then, there has been a steady increase in interest rates and experts predict that the trend will continue through till 2022. This, as a result, may be a good time to refinance your existing mortgage and take advantage of lower interest rates. Refinancing a home loan can be beneficial if you are troubled with high monthly repayments. If you choose to go the cash out refinancing way, you may even borrow against the equity you have built.

Remember that while the best uses for tax refunds may vary from one person to the next, using the money to achieve financial stability is always a good idea. If you are still not sure about how to use your tax refund wisely, do not hesitate to seek professional assistance.

Please note that the above article is general in nature and for informational purposes only. It is not intended to be relied upon or interpreted as a legal opinion or advice. Kindly consult your tax advisor or attorney for more information.

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