While some people dread tax season, many others who are entitled to refunds from the IRS look forward to it. The size of a tax refund can vary depending on a number of factors, but the average federal tax refund is around $2,895.
Getting a refund of this size can be exciting, so many people use the money to celebrate. About 11% of people in the U.S. plan on using their tax refund to pay for a vacation, while another 5% plan on buying themselves something nice. But, there are smarter ways to use your tax return. Here’s how potential homebuyers and homeowners can invest their refund into their homes:
Homebuyers: Investing In A Future House
Many people would like to become homeowners, but they do not have enough cash for a down payment. Although it is often said that buyers need to put 20% of the purchase price down on a home, that is not always the case. Some buyers can qualify for loans that allow them to make a down payment of only 3% of the purchase price. A 3% down payment is a much more attainable goal for many potential homebuyers—especially if you put your tax return towards reaching it.
If you’re expecting a refund this year, plan on putting the money towards a down payment on your future home. If you don’t have enough saved, using your tax return could help you make the minimum down payment required by your lender.
All potential buyers should put their tax return towards their down payment—even those who already have enough money saved to make the down payment on their own. Why? The larger the down payment, the less you will have to borrow from the bank. This means you will be able to make smaller monthly payments and pay less in interest overall since you are not borrowing as much money.
For these reasons, every potential buyer should immediately put the money refunded to them aside so they can put it towards their down payment.
Homeowners: Investing In Your Current House
Homeowners who are expecting a check in the mail from the IRS should consider using this money on home improvement projects. There are countless home improvement projects that can increase the value of your home, which means you will be able to sell your home at a higher price when you’re ready to move. Even if you’re not planning on moving in the near future, these upgrades can still be made now. Before you start renovating, it’s important to understand which upgrades actually add value to your home.
- Landscaping is one of the home improvement projects with the highest returns. According to the American Nursery Landscaping Association, the average homeowner spends about $3,500 on landscaping. This money will be spent on improving your home’s curb appeal, which can draw more buyers in and make the home easier to sell in the future. It will also increase the home’s overall value, so homeowners can easily recoup the $3,500 they invest in this project.
- New flooring can also increase the value of your home. In fact, real estate brokers estimate that homeowners who spend between $600-900 on new flooring can get an additional $2,000 when it’s time to sell their home. If you can afford to spend more, it’s best to upgrade to hardwood floors or refinish the ones in your home. Why? The National Wood Flooring Association reports that 90% of real estate agents believe homes with hardwood flooring sell for more money than homes without it. Therefore, it’s wise to invest your tax return in new hardwood flooring.
- Making various energy efficient upgrades can also add significant value to your home. For example, replacing old kitchen appliances with Energy Star models is a great way to update the kitchen and improve its energy efficiency as well. Other energy efficient projects include sealing air leaks, adding insulation, and replacing drafty windows.
As time goes on, buyers are becoming more and more interested in purchasing energy efficient homes. By making these changes now, you can appeal to this growing group of eco-conscious buyers when you’re ready to sell your home in the future. In the meantime, you can also save money on monthly utility bills since these projects will lower the amount of energy consumed in your home.
It can be tempting to use your tax refund to reward yourself with a vacation or a gift. But this year, invest this money into your home instead. It may not be as exciting as going on a glamorous vacation, but it’s much smarter. By investing this money now, you can put more money in your pocket in the future!