South Bend Home Loan

Monday, January 6, 2014

Turning Your $2,900 Tax Refund Into $194,417

I'll admit it, I'm HORRIBLE about pre-spending my annual tax refund.  I don't actually spend it before February but I typically have a specific plan for that money months and months before it ever arrives from the IRS.

Typically it goes for something reasonable like paying off a debt, shoring up some savings or replacing something that needs replaced.  All of those are valid, good uses for my refund, but none of those uses help me out long term.  None of those uses set me up for a more stable financial future.

But what if your tax refund could?  What if you could take a $2,900 tax refund and, over time, convert it into $194,417?

Let's Buy A Home!

You could do exactly this if, instead of frittering your refund away, you invested it in a home purchase.  Let me share the details with you.

To buy a home with a FHA mortgage, you need 3.5% of the homes price as a down payment.  There are also costs involved with getting the loan and covering your first year of insurance, tax escrows, etc. but you can normally negotiate for the seller to cover those for you.  By having the seller cover those, your $2,900 tax refund will cover the entire down payment needed on a $82,850 home. 

Yes, There Are Ownership Costs....

Of course, there will be a monthly mortgage payment that goes along with that $82,850 home, but it is likely similar to or less than your current rent.  The estimated mortgage payment on an $82,850 home right now is $650 per month, give or take a bit depending on the interest rate, property tax costs and home insurance costs.

This $650 should cover the mortgage payment, but you will need to plan for other costs as well.  Utilities will be covered by you as will maintenance and repairs.  People tend to forget about these last two pieces when dreaming about home ownership and you really shouldn't. Things will break.  It's part of life.

If covering the cost of future repairs concerns you, you can ask the seller to buy a one year home warranty for you up-front that will cover many of those costs in the first year if they arise with you just paying for a small service call fee.  This gives you a year to get comfortable with the home and get a feel for what might break in the future.  At the end of that year, you can renew the warranty at your own cost if you wish. 

But, OH, the return!

 So yes, there will be reoccurring care costs with owning a home and you will likely need to invest your entire tax refund into it upfront, but OH, the return it will give you!  You see, every year, your home value increases.  Certainly, there are years and economic cycles where home values dip but when viewed long term, you can reasonably expect an increase in your home's value. 

To be conservative, let's assume your home goes up in value 3% each year (last 15 year average was 4.2% per Zillow).  Each year you are also paying the mortgage down.  After 30 years, you will have the mortgage paid off and - assuming that 3% increase each year - your home will be worth $194,417.

Is that right??  Yep, that's right.  By investing your tax return now and paying a mortgage payment instead of wasted rent, you will build an asset that will not only provide you shelter but, 30 years from now, will be worth almost $200,000 if you chose to sell it and move to Cancun. 

Not For Everyone, But Maybe For You

Truly, home ownership is not for everyone.  Many people have no cushion in their budget to cover the occasional repairs that come up, even with a home warranty in place.  Some people are not going to stay in the area long-term so the magic of time won't really work for them.

For many people though, home ownership makes perfect sense.  The 2010 median net worth for a renter in America was $5,100 while the median net worth for a home owner was $174,500.  The value of the home itself is a large reason for this. 

So, you have a choice.  Pay down the credit card, buy the bigger TV or invest in an asset that will start you on a path to greater wealth and security.  Which makes more sense to you?

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office.  One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University.  You can connect with Lori Hiscock or apply online here.