first time home buyer – owner loan

Marlon Baugh asked:


Have you ever heard of the Housing and Recovery Act of 2008?  Well today we are going to focus on one of the benefits, the $7500 First Time Home Buyer IRS Tax Credit.

Even with interest rates at historical lows and with a wide selection of discounted homes on the market, people still weren’t buying, so the government came up with this tax credit to stimulate and provide financial assistance for First Time Home Buyers to buy now rather than wait.

The $7,500 First-Time Home Buyer IRS Tax Credit only applies to first-time home buyer purchases of a primary residence between April 9, 2008 and July 1, 2009. It is important to understand that this is a TAX CREDIT and not a TAX DEDUCTION.  Now a tax credit is a reduction in income taxes owed! In other words, when a buyer files their income taxes for the year the home was purchased (April 2008 – July 2009), they may be able to subtract $7,500 from the amount of federal income tax liability, which will either put more money in your pocket as you will get an increased tax refund or reduce the amount of tax still owed.

However, this tax credit is not FREE. Yes, this is not a hand out from Uncle Sam; it is a loan that has to be paid back. Repayment will begin 2 years after the credit is claimed, and must be repaid within 15 years. So that’s a $500 payment per year. It’s an interest-free loan for 15 years.

Now before you get turned off by this “LOAN,” lets take a look on the benefits this $7500 tax credit may provide.  Majority of first time home buyers have walked away from the closing table with an empty savings and or checking account once the purchase of their home is complete.  Now they have a home to decorate, furnish and in some cases repair and paint.  Majority of these first time home buyers will now turn to their credit cards to pay for these expenses, which will come with pretty high interest rates.  So when compared to have a credit card payment which comes with interest charges, versus and an interest free $7500 loan…..it now seems a little more attractive.

Now for those of you first time home buyers that are a little more well off financially, this can still benefit you….here’s how.

Let’s assume a $200,000 mortgage was needed in the home purchase at 6.0% interest rate fixed for 30 years. What if the $7,500 tax credit was a refund which you used to pre-pay the mortgage?  Using simple math that would be an annual interest savings of $437.50;  which is actually less than the $500 payment per year on the $7500 Tax Credit Loan.

The main benefit here is not just the payment savings but the outstanding mortgage balance will be reduced by $7,500 and each future mortgage payment results in savings in mortgage interest and increased reduction in principal mortgage.  As each monthly mortgage payment go to reducing the mortgage balance and less is applied to interest. Together these savings will exceed the $500 cost of repayment of the tax credit. The benefit over the long term in interest savings and principal reduction will be quite amazing.  Talk about good old Uncle Sam helping you payoff your mortgage early!



Lorraine