Use tax refund as down payment?

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Coming up with a down payment to buy a home is one of the biggest obstacles that renters 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, mortgage professionals say.

We’re not talking huge amounts

Derek Egeberg, a branch manager for Academy Mortgage in Yuma Ariz., says about half of the homebuyers he is currently assisting plan to use their tax refunds as a down payment to buy a house.

“These are homes in the $100,000 to $125,000 range,” he says. “They need 3.5 percent down, and some are expecting to get $4,000 from their tax returns.”

The average tax refund last year was about $2,800, according to the Internal Revenue Service. Borrowers who qualify for a Federal Housing Administration loan would have to come up with about $6,000 for a 3.5 percent down payment for a home with the median U.S. home price of about $178,000. The tax refund helps even if it doesn’t cover the entire down payment, Egeberg says.

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. Egeberg says it makes 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, he says.

But …

But the decision to buy a house shouldn’t be based on whether it’s a good time to buy, says Ed Conarchy, a mortgage planner and financial adviser at Cherry Creek Mortgage in Gurnee, Ill.

“Before you buy a home, you need to make sure that you are ready to buy a home,” Conarchy says.

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.

“The only reason they have the money is because they paid too much in taxes,” he says. “And if they have not been saving for a down payment, odds are they have revolving debt and don’t have a rainy-day fund.”

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, he says.

“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?

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