The $8,000 federal tax credit for first-time homebuyers was a pretty popular program. It’s gone now, but there are other sources of tax benefits for first-time homebuyers.
I’m going to talk about the programs for Indiana, but you should check into stuff your state offers.
According to the Indiana Housing & Community Development Authority, there are three featured programs for first-time homebuyers: First Home, First Home Plus, and Mortgage Credit Certificate programs.
All of them have income requirements, as in, you cannot have a household income greater than the established threshold for the county. Some counties income limits seem pretty high to me. One county is $97k! So even if you don’t consider yourself to be a low-income family, you may very well qualify.
I spoke with a lender who does this program (because not all lenders do — you have to work with a participating lender) and she told me the household income is verified by you supplying the last three years of tax returns.
First Home program: Offers lower-than-market-rate interest rates for qualifying borrowers. That is 4.5% for a 30-year loan right now.
First Home Plus program: Offers the same interest rate as the previous program, plus up to 6% down payment assistance, capped at $7,500. It essentially is a 0% interest loan that needs repaid when you sell the house. Income limits are a bit lower for this program.
Mortgage Credit Certificate: This is the program I’m interested in. This is a tax credit to apply to our federal taxes. The tax amount ranges from 20-35% of your yearly mortgage interest, and the exact percentage depends on the amount of money you borrow for a house. For us, the credit would be 20%. The maximum per year credit would be $2,000. Because of how mortgage interest is amortized, each year we would pay more toward our principal and less interest, so the tax credit will decrease each year, too. The credit is good for the life of the loan but a portion could be recaptured if we sell before a certain time.
The lender I spoke with said these programs can be a bit back-logged and it might take longer to process and close. She said I could expect 45 -60 days instead of a more typical 30 day length.
She also said that I would have to get a 30-year loan if I wanted the MCC program. The rate is 4.5% interest, which happened to be better than her bank’s 4.75% rate for a regular 30-year loan. By comparison, her bank’s 15-year rate was 3.875 today.
There is a fee at closing for the MCC program, equal to .5 point. So for a $100,000 loan, that would be $500 due at closing.
Assuming we borrowed $100k at 4.5%, the first year’s interest would be a little bit more than $4,428. Twenty percent of that is $885 that we’d get back on our federal taxes that year.
With no extra payments ever, borrowing $100k at 4.5% for 30 years means paying $82,406 in interest. If we stayed in the house for 30 years, our full benefit for the MCC would be $16,481. Not interested in paying for 30 years.
Treating a $100k loan as if it were a 15-year loan at 4.5% means paying $37,698 in interest over the 15-year term. We’d have to pay an extra $258.30 per month for it to be like a 15-year, so $764.99/month. The MCC benefit for a full 15 years would be $7,539.
If we include the $500 closing fee and the MCC credit for 15 years, it would be like paying $30,659 in interest.
Let’s say we forget the whole MCC thing and just get a 15-year at 3.875 percent. That would save us $500 at closing. The monthly mortgage would be $733.44. Total interest for the 15 years would be $32,019. If we bumped our monthly payment to $765/month (what it would be if we took out the MCC 30-year loan but paid like it was a 15-year at the 3.875 rate), our total interest would be $30,122.
Following me with all this?
Put another way, if we said we wanted our monthly payment to be $765 no matter our interest rate, we would come out ever-so-slightly ahead if we just went with the 15-year loan at that interest rate, rather than messing with the MCC program. This is also assuming we’d stay in the house the entire time. The benefit changes if we move sooner, and it definitely is worse if we have to repay a portion of it. I still need to read up on the recapture fees.
I will need to do the math based on the real figures we use — the actual amount of money we want to borrow and the actual interest rate for 15-year loans. One other thing, our closing costs will be a little less with a 15-year loan.
We would still be able to deduct our mortgage interest, but it would be a deduction rather than a credit, which is a BIG difference. It also would depend if we would be able to itemize our taxes in a particular year. I think maybe we might be able to itemize for this tax year, but I don’t think it would be something we’d be able to do for most years.
Let me know if you know of other first-time homebuyer programs and what you think of my assumptions and math and if you think it would be better to go the MCC route or just lock in at a lower rate.
EDITED TO ADD: I suppose we could also take the amount of the yearly tax credit and apply it to the principal of the loan, thereby accelerating our loan payoff and reducing the amount of interest we’d pay over 15 years. That will take a more elaborate amortization schedule. I’m on the case.