| HeraldNet - Snohomish County's online news source |
 THURSDAY, JULY 29, 2010 1:48 pm |
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Tax credit on interest can save first-time homebuyers a bundle Most potential homebuyers are well aware of the tax credits available before June 30, but few first-time buyers are aware of another subsidy that has no deadline yet and could prove to be a huge benefit for cash-strapped consumers.The Mortgage Credit Certificate Program was authorized by Congress in 1984 to help low- and moderate-income families. To qualify, buyers must not have owned a home in the previous three years, must meet income and purchase price restrictions, and must intend to use the new home as a primary residence. The household income and home purchase price limits vary by area. For example, the income ceiling for a Snohomish County family of four is $97,000 and the home price cannot exceed $370,000. The mortgage credit certificate is a document from the federal government stating the borrower is entitled to a tax credit equal to 20 percent of the interest on the borrower's home loan each year, capped at $2,000. The credit is typically applied to the borrower's federal tax bill after all other deductions are used. “The benefits of this program are extraordinary,” said Tom Lasswell of Guild Mortgage in Lynnwood. “Borrowers may use this option to increase purchasing power, reduce tax liability or both.” These credits reduce taxes on a dollar-for-dollar basis, unlike tax deductions, which reduce taxable income. Here's how they work: Buyer obtains a 30-year, fixed-rate loan of $250,000 at 6 percent interest. The monthly principal and interest payments are $1,499 and a mortgage certificate credit rate of 20 percent. In the first year, the buyer pays a total of $14,916 of interest on the mortgage loan. The certificate would then provide a federal income tax credit of $2,983 (20 percent of $14,916). If the buyer's income tax liability is $2,983 or greater, the buyer receives the full benefit of the tax credit. If the amount of the tax credit exceeds the amount of tax liability, the unused portion can be carried forward (up to three years) to offset future income tax liability. The remaining 80 percent of mortgage interest, or $11,933, qualifies as an itemized income tax deduction. To receive the immediate benefit of the tax credit, the buyer files a revised W-4 withholding form with the buyer's employer to reduce the amount of federal income tax withheld from wages, increasing take-home pay by $249 per month ($2,983 divided by 12). By applying the increase in-take home pay of $249 towards the monthly mortgage payment of $1,499, the effective monthly payment becomes $1,250 ($1,499 minus $249). People need to be careful about refinancing and understand the rules regarding the possible recapture of the subsidy if the home is sold within nine years. During the nine years in which the recapture tax may apply, several factors determine the amount. The tax is based on the original mortgage amount, the borrower's income at the time of sale, and the gain realized on the sale of the residence. The tax could never equal more than half the gain of the sale. If the borrower's income does not rise significantly over the life of the loan (more than 5 percent a year), he or she would not be required to pay a recapture tax. If the house is sold within the first nine years, the tax must be paid in the year of sale. Because income and family size may change during the period the borrower owns the house, it would be difficult to predict the amount owed. While some real estate agents have complained that the program sets people up to pay a tax, the certificates were designed to get people in the door of their first home — not to guarantee them a gain. In addition to Guild Mortgage, lenders approved by the Washington State Housing Finance Commission to offer the certificates are Bank of America, Cobalt Mortgage, Cornerstone Mortgage Company, Eagle Home Mortgage, Evergreen Home Loans, First Rate Mortgage, Golf Savings Bank, Integra Pacific Mortgage, Metlife Home Loans, Mortgage Advisory Group, Prime Lending, Seattle Metropolitan Credit Union, Wallick & Volk and Wells Fargo Home Mortgage. Tom Kelly can be reached at www.tomkelly.com. |
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