How to Use Your Tax Refund to Buy a Home

Save for a Down Payment

Saving for a down payment can be one of the largest barriers to homeownership, and the typical homebuyer makes a down payment between 5% and 20% of the purchase price. Using your tax return to help with a down payment may help you reach your goal more quickly than expected.

You can also explore low down payment mortgages, such as Freddie Mac's Home Possible^® and HomeOne^® mortgages, which  require only a 3% down payment.

Down payment assistance programs can also help you bridge the cash gap. Consider meeting with a housing counselor to discuss your options.

Pay for Closing Costs

Before you officially take ownership of your home, you are required to pay fees to your lender, real estate agent and other third parties involved in the homebuying transaction. These are known as closing costs. This is another area where you could direct your tax return.

Typically, homebuyers will pay between 2% and 5% of the purchase price of their home in closing costs, or between $4,000 and $10,000 on a $200,000 home. Closing costs will vary depending on where you live, so be sure to review your situation to fully understand your costs.

Lower Your Interest Rate with Discount Points

During the homebuying process, your lender may present you the option to pay discount points to buy down your mortgage interest rate. A "point" equals 1% of the loan. Discount points are essentially an upfront interest payment to lock in a lower interest rate on your fixed-rate mortgage.

Using your tax refund to pay discount points may help lower the amount of your monthly mortgage payments. However, recent Freddie Mac research shows that there is not a significant financial benefit to buying discount points.