If you’re expecting a tax refund check this year, you might be thinking about a shopping spree. But while it’s okay to splurge, it’s not every day that you receive a lump sum of money—so put the majority of this cash to good use.
Here’s a look at six smart things to do with your tax refund check
1. Pay off credit card debt
Credit card debt can be the most expensive kind of debt, especially if you carry balances from month-to-month or year-to-year. Using a tax refund to eliminate this debt—or at the very least, pay down your balances—could save you a lot of money. As an added bonus, getting rid of credit card debt helps increase your credit score, making it easier to get a mortgage or auto loan in the future.
2. Put it in a savings account
If you don’t have a minimum 6 to 12 months of income in an emergency fund, use your tax refund to strengthen your safety net.
And if you already have a strong emergency fund, start saving for another purpose. Can’t remember the last time you had a vacation? Put this money toward planning a memorable experience with your family, start a home improvement project or open an educational fund for your children.
3. Open an individual retirement account
Opening an IRA is an excellent idea if your employer doesn’t offer a 401(k) retirement plan or if you want to supplement your workplace retirement plan. It’s perfectly okay to contribute to both types of retirement accounts at the same time. This increases your retirement savings and builds a stronger nest egg for the future.
4. Build a down payment fund
Maybe you’re tired of renting but feel you don’t have enough money to purchase a property. If so, start a down payment account with your tax refund.
Typically, you’ll need a minimum 3.5% to 5% down for a home purchase, plus you may be responsible for closing costs, which can range between 2% to 5% of the loan balance.
5. Make an extra mortgage payment
Another thing you can do with your tax refund is make an additional “principal-only” mortgage payment. It might come as a surprise but making one extra mortgage payment a year can potentially reduce your home loan term by several years, depending on when you start making the extra payments.
6. Refinance your mortgage
And while we’re on the subject of home loans, you can also use a refund check to pay closing costs associated with a mortgage refinance.
Refinancing is the process of applying for a new home loan to replace an existing one. A refinance can lower your mortgage interest rate and monthly payment, but it also involves closing costs.
Tax season only comes once a year, so make good use of any refund check you receive! Consulting a financial advisor is a great place to start. If you’re thinking about putting your refund check toward a home purchase or refinance, the loan experts at FirstBank Mortgage can help you find the right program. Give us a call today or fill out the contact form.
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