Approximately 80 percent of all Americans who file taxes receive a tax refund each year, with an average of about $3,000 each. While it’s possible for everyone to find more than a few things to do with this extra money, there are some who wonder: Should I Use My Tax Refund to Pay Down My Mortgage? This is a good question and really depends on a person’s financial situation and other factors.
When Does it Make Sense to Pay Down a Mortgage?
Before making the decision to send a tax refund check to a mortgage lender, it’s important to weigh all the options you might have. For some people, paying down a home mortgage with their tax refund makes fiscal sense. However, for others, it may make more sense to use it as a down payment or to buy a home if they don’t already own one.
High-Interest Debt
Before paying down a mortgage, a homeowner should focus on repaying their high-interest debt obligations. If a person has credit card debt, those accounts will likely have higher interest rates, with some reaching 22 percent or more. If this is the case, a smarter option is to pay the high-interest debt off first. Credit cards, along with other high-interest debts, can become a financial burden, which means they should be paid before putting money on a mortgage.
Emergency Fund and Strong Savings in Place
Having a “cash cushion” to cover any unexpected expenses is an important step to achieve a stable financial future. Regardless of whether it is a termite invasion or a burst pipe, there are all types of unforeseen costs that may be covered with an emergency fund. The size of the emergency fund a person needs depends on their specific situation, but it is a good idea to have at least a few months of the person’s salary set aside to cover unexpected expenses.
Retirement Accounts Are Maxed Out
Whether with an IRA or a 401(k), maxing out a person’s retirement savings needs to be a top priority. Putting a significant amount of money into a retirement fund is much more beneficial if the person’s employer will match part or all of the financial contributions that are made.
Why Paying Down the Mortgage May be a Smart Move?
If a person has taken care of their high-interest debt and has money put to the side for the future, they can begin to think about paying off a home mortgage early. When additional payments are made on a mortgage, it’s possible to reduce the interest that must be paid during the life of the loan. The savings can be quite significant.
It’s a good idea to keep the factors here in mind when trying to decide how to use a tax refund. The information here should provide a bit of insight on some of the options that are available. Keep this in mind to ensure the right decision is made for the tax refund a person is owed.
