Creative Uses for the $7500 Tax Credit

Creative Uses For the $7500 Tax Credit

By James Duffy

The buzz about the Housing Stimulus Bill that President Bush signed into law last month is the $7500 tax credit that First time homebuyers receive now through July, 2009. The bill, H.R 3221 bill was signed into law in July. There was a lot of content in that nearly 800 page bill, but one of the nicest, if you don’t own a home already, is that First Time Homebuyers will get a tax credit of up to $7500, in the year they purchase the home, if purchased between this past April 9, 2008 - July 1, 2009.

This $7500 gift will be phased out for single filers making $75K a year or more, up to $95K when there is no tax credit. Married folks, that is $150K, and the credit phases out by $170K earnings per year.

The bad news: You will have to pay this tax credit back in equal installments of $500/year for 15 years. Consider it an interest-free loan from the government, recouped a bit at a time each April 15. If you sell your home before 15 years, then the balance will be recouped that year.

Although, there are some caveats to that. If you sell the home before 15 years and no there has been no appreciation, it is forgiven. If you die before 15 years, the loan is forgiven, it is not passed on to your heirs. Well, at least you have that going for you!

Yeah, okay, it is a tax credit that is really just a no interest loan to be repaid over the next 15 years. What good is that? Well, here’s 3 ways it can be good.

STRATEGY 1: Use the $7500 tax credit to pay down debt. Now is a terrific time to buy a home, and the tax credit just makes it easier and more attractive. That said, too often I find young, first time homebuyers around Atlanta eagerly get into a home, with good financing. But, they bring a couple credit cards along with them, and with that burden, the house is a point of stress rather than a home that is a source of joy.

So, now’s your chance. If you are wanting to buy that home but just cannot seem to off-load that credit card, then take a good, hard look at this opportunity. If it is right for you, then jump at it. If you are not quite sure, you can call me and we can see, or you can call your CPA and check it out from that angle.

That all comes back to my 4 Step Priority of Cash Flow that I teach first time buyers. Here is your opportunity to knock out steps one and two right away. Explaining the 4 Steps is a whole other article, for a future date.

STRATEGY 2: A $7500 tax credit will be a money seed that grows into a tree. This just came up with a first-time buyer in Marietta, GA who just closed on the first home for he and his wife. When I told him of the tax credit, the borrower simply stated, “We don’t need the money, and we will have to pay it back, so can we just refuse the tax credit?” Well, I don’t believe that is an option, but I suggested that, not needing the money, he and his wife take the credit when it arrives, and invest it in a conservative investment with an 8% rate of return. They are out there. I can put you in touch with a good CFP for advice, if you like.

Well, let’s see:

5 year total: $7500 becomes $10,421
10 year total: $7500 becomes $14,480
15 year total: $7500 becomes $20,120

It’s not enough to retire on, but it sure gets you a long way to Step 3 of my 4 Step Priority of Cash Flow; all on Uncle Sam. Okay, not all, you have to repay the $7500 by $500 a year, but that is at tax time each year. For a lot of folks who are W-2 income earners, it becomes a somewhat painless recovery of the funds. So, use this gift wisely.

STRATEGY 3: A $7500 tax credit can buy more home. I talk to prospective buyers often who would love to jump in and buy the home they want; but have to wait for something to happen before they can afford their dream house. Usually it is one spouse returning to work, or something along those lines.

Well, if income is set to jump within a year, and that home that you really want is just out of range, then the tax credit could make that happen for you now. Let’s assume a buyer has a payment comfort level of $1600/month. Assuming a 3% down payment the buyer can afford a home in Roswell, GA for approximately $210K. PITI on this home would be $1585 assuming a 6.5% 30 year fixed FHA mortgage.

Hypothetically the prospective home buyer could use the tax credit to increase their monthly housing budget allowance from $1600/month to $2200/month and still be within their comfort range for the 1st year. Remember, the tax credit will effectively put $625/month into their checkbook for the 1st 12 months.

“Yeah, but that only appears next April. That’s not fair math. I won’t see that money for months!”, you might be screaming. No, you can adjust your W-4 withholdings, and bring home more out of each paycheck to cover the payment until the spouse goes back to work next year. Simple. (*As always, consult with a tax professional, etc.)

How much more home would a $625 monthly budget buy? About $90,000.

You don’t like the $210K home and can’t see staying in it long term. How about the $300K home? Now we’re talking. Just be careful with this strategy. Like the Force, use it wisely.

Jim Duffy is a Mortgage Banker with Phoenix Global Mortgage in Atlanta, GA, and has helped thousands finance their homes over the years. Check out his blog, http://www.MortgageLenderAtlanta.com

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Jonathan Blackwell

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