It’s the time of year when the flowers are blooming, the birds are chirping, and summertime is just around the corner. That’s right: It’s tax season. While hunkering down to file taxes may not be your ideal way to spend a spring afternoon, there’s a silver lining — a refund could be coming your way.
For the 2021 tax filing season, the average refund works out to $2,967. If you’re getting a refund this year or already received one, what are some smart ways you could use it, especially if you own a home or plan to buy one?
1. Home improvements
House projects and upgrades can make your home more livable and even increase its value. But repairs and renovations don’t always come cheap, and refund money can be a helpful savings boost. According to a Civic Science report, 15% of homeowners expecting a refund this year plan to use it for home improvements.
When using tax refund money for home upgrades, consider what’s going to offer the best return on your investment. Some of the top ways to make the most of your home improvement spending include:
- Replacing appliances with ones more energy efficient
- Getting a new front or garage door
- Painting kitchen walls and countertops
If you plan to sell your home eventually, these kinds of projects could make it more attractive to buyers.
2. Pay down mortgage principal
Depending on how large your refund is, you may be able to speed up your mortgage payoff by putting it towards the principal. By lowering how much you owe, you may not have to pay as much interest in the long run, helping you save money over the life of your loan. If you plan to use part or all of your refund to pay down your mortgage principal, make it clear to your lender, such as Ally Home, how you want the extra payment applied.
3. Save money toward mortgage refinancing
Refinancing your home loan can lead to savings if you’re able to get a lower interest rate. But the refinancing process isn’t free — you typically pay closing costs similar to your original mortgage. You might consider putting your tax refund toward covering those costs, especially as mortgage rates are still near historic lows.
If you’re interested in refinancing your mortgage, run the numbers through Ally’s Refinance Calculator to estimate your potential savings and help find your break-even point. You can also compare rates on mortgage refinance loans through Ally Home.
4. Save it for a down payment
The biggest hurdle to owning a home isn’t always finding the right property. For many, it’s coming up with the money for a down payment.
Typically, the recommended down payment amount is 20% of your home’s purchase price. Closing costs can run another 2% to 5% of the home’s purchase price.
Let’s say you want to buy a $300,000 home. At a minimum, you will need anywhere from $66,000 to $75,000 to cover the down payment and closing costs. While your tax refund likely won’t cover the entire amount, it could help you reach your savings goal faster.
5. Save or invest toward future home expenses
You pay upfront costs to buy a house, but you might have other large home-related expenses later once you officially own the property. To make the home yours, you might want to make some renovations or repairs. Or you may want to build an addition someday, like an extra bedroom or a garage.
That’s where your tax refund can come in handy: By stashing the money away now, you’ll build up funds for future home expenses down the road.
But which is better, saving a tax refund or investing it?
Saving your tax refund in an interest-earning savings account (like our Ally Bank Online Savings Account), money market account or Certificate of Deposit (CD) account can be a smart option if you only plan to save for a few months or a year. That way your money will continue to earn interest, but it’ll also be FDIC-insured (so you don’t have to worry about losing any principal).
If you plan to save for a few years, investing your tax refund could help grow your money faster. With Ally Invest, for instance, you could use your tax refund to open a Self-Directed Trading account if you’re comfortable with DIY investing.
Or you could take a more hands-off approached and invest in a Robo Portfolio. You’ll have access to automated investing with no advisory fees and portfolio management using robo-advisor technology combined with real human expertise.
If you’re not comfortable investing all your refund, you could split the difference and put some in savings. This way, you can get security on one side and the potential for higher returns on the other.
The bottom line
You might not dream of it finally being tax season each year, but the possibility of a return can make it a more exciting time. And while you can choose to use the money for leisurely spending, it can also be a great asset if you have home-related financial goals — whether you’re interested in applying for a mortgage, refinancing an existing home loan or saving or investing your refund until you need it.
Make the most of your refund with Ally Home.