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For some of us, tax refunds can mean extra money back in our pockets. Maybe you’re considering using it towards your next vacation or to help pay off bills. If you’re a homeowner, you may want to consider a few different ways you can use your tax refund that may be more beneficial for your future. This recent U.S. News & World Report article by Marietta Rodriguez, shares what you can do with you refund if you’re a homeowner.
Build a home emergency fund. No matter the amount of a refund, homeowners should look hard and long at setting aside a portion of their cash for their homes. According to studies by the Federal Reserve and others, millions of Americans, including many homeowners, don’t have a $400 cash reserve to cover unexpected emergencies like a water heater or other major appliance needing to be replaced or repaired.
Because home prices have been increasing since the Great Recession and income growth has not been keeping pace, buyers have been less able to set aside money for the eventual costs that being a homeowner entail while saving for a down payment.
While most mortgage lenders require that homeowners have a reserve fund in place when they purchase their home, over time reserve funds can be drawn on for other expenses. Essentially, an out of sight, out of mind mentality sets in when everything is going well with the home.
But home repairs can be costly, and not planning for them could be a sudden financial burden. For example, experts recommend that heating and air conditioning systems are checked each year at a cost usually less than $100, and serviced every few years – at a cost of few hundred dollars – but if these systems break down and need to be replaced, the costs run into the thousands of dollars.
Pay down mortgage and credit card debt. Twenty-one percent of consumers in the NeighborWorks America survey said they would use their anticipated tax refund to pay down debt. Once an emergency reserve fund has been established, paying down debt is a top recommendation of housing and credit counseling organizations around the country.
Credit card interest rates far exceed what a homeowner could earn in a savings account. Although 60 percent of people don’t carry over credit card debt – and thus pay no interest – 40 percent of people do, and many of these are homeowners. Paying off credit cards as soon as possible can save hundreds of dollars or more in a given year.
Homeowners who regularly choose to put a little extra into their mortgage payment each month could shave years from their 30-year mortgage loan. It’s especially important to think about paying more on an adjustable-rate home equity line of credit. The Federal Reserve Bank of New York reported more than $470 billion of HELOC debt outstanding as of Sept. 30, 2016.
Many homeowners who have a HELOC will soon see their payments change from interest only – when none of the principal that was borrowed is being repaid – to a fully amortizing loan, where principal and interest is expected to be paid each month. The fully amortizing loan will cost considerably more.
Add to your retirement account. Many homeowners consider the rising level of their home equity as a major part of their retirement plan. But millions of homeowners, particularly low- and moderate-income homeowners have not seen their home equity recover from the Great Recession.
In fact, real estate information company Zillow reports one out of 10 homeowners owed more on their homes than they were worth in the third quarter of 2016. Importantly for homeowners whose houses are priced below the median level for their metropolitan area, the depth of negative equity is even greater – about 16 percent, according to Zillow. Home values are growing in these markets, but there is a long way to go.
Given that, homeowners who have the option of putting money aside for retirement should strongly consider that choice. Even if the refund that’s invested in a retirement account is small, every dollar set aside matters. Keep in mind that the money will have a chance to grow, particularly if there are several years or even decades before retirement.
The perks of owning a home are many. There’s the undeniable independence, the freedom to customize to your style—whether just a simple paint color or bigger projects, like a window replacement. And then there’s the comfort of no rising rent. Owning a home means putting down roots and giving your children a stable environment in which to make countless memories.
While buying a home as a single parent can feel like an enormous undertaking, there are plenty of resources out there to make it as simple a process as possible.
Find out What You Want and Line up Your Finances
First and foremost, if you want to buy a home, you should do your research early. Check your credit score and find ways to boost a low one. Make sure your credit report doesn’t contain any errors. Take note of prices in the desired area, see how long they stay on the market, and watch how the prices may change the longer they stay. Go ahead and gather the documents related to your income, debts, and assets.
Familiarize Yourself with the Mortgage Process
Sometimes, single home buyers can experience more difficulties obtaining loans than dual home buyers with two incomes. But if you choose a trustworthy lender and look for special programs designed to help single parents, your dream home could be within reach. Down payment assistance programs may be available in your state, and you should also look into FHA and USDA Rural Development loans. Even if you’ve technically owned a home before, you may be considered a “first-time buyer” as far as assistance is concerned depending on your situation. With a low or non-existent down payment, you’ll be able to act quickly on the home you want without having to save up.
Again, research is vital. Familiarize yourself with the home buying process and organize your finances before you apply for any assistance programs or home loans. Find out what the qualifications are for the assistance programs and prepare the documents that will verify your eligibility.
Get Prequalified
The best way to be sure of your price range is to get prequalified for a mortgage. Since you’ve already organized the relevant financial information, this shouldn’t be a complicated step. Your lender will then tell you how much they can lend you and what price range you’re working with.
Talk through All of Your Financial Options
Make sure your lender is certified to offer the assistance programs you’ve researched. A quality lender will be by your side from application to closing and will have extensive experience with the government programs available to assist you. Your loan processor or officer should be in touch with you throughout the process to help you work through any issues that might arise.
Simplify the Home Buying Process
Most people, especially single parents, are looking to simplify the home buying process. It would be easy to get bogged down with all the paperwork and communication between different parties. That’s where carefully selecting the people and companies you work with makes all the difference. If you can trust your lender to communicate clearly, work with assistance programs, and guide you through the steps, then the home buying process can be simple. If you choose the right partners in this journey, purchasing your home will be a rewarding adventure.
Hannah West writes for Modernize with the goal of empowering homeowners with the expert guidance and educational tools they need to take on big home projects with confidence. In addition to her focus on home improvement, she has a young adult novel, Kingdom of Ash and Briars, debuting in fall 2016.
