Well, if you are a first-time home buyer and you don’t mind filling out a few extra forms, this tax credit can save you thousands. It’s a Mortgage Credit Certificate (MCC) issued by certain state and local governments that allows a taxpayer to claim a credit for a portion of the mortgage interest paid during a given year.
Let’s talk about the difference between a “tax credit” and a “tax deduction”. A tax credit is a dollar-for-dollar savings that lowers your total federal income tax liability by the value of the credit. Whereas, a tax deduction only reduces a percentage of the amount deducted. We are talking quarters versus dollars here. Tax credits can be more valuable than deductions, although somewhat more difficult to qualify for.
Here’s how it works: Let’s say you borrowed $200,000 at 5% on a 30 year fixed mortgage. Your principal and interest payment will be $1,073 a month. After twelve payments, you will have paid $9,933 in interest and $2,950 towards the principal balance. In Sacramento, the program offers a full 20% tax credit on the amount of interest paid (20% x $9,933) equals $1,986 that can be deducted from the amount of Federal Income Tax you owe.
Remember, this tax credit is a dollar-for-dollar credit that you get to subtract from your income tax bill! And, you still get to deduct the remaining $7,946 in mortgage interest (Hint: Remember tax credit versus tax deduction). The best part? You can continue to get this tax credit for as long as you have the mortgage and continue to live in the home as your primary residence. For more information, see the IRS publication 530, Tax Information for First Time Home Buyers. (Click Here)
You can combine a MCC with many of our current loan programs, but there are a few extra forms you have to complete. If you are my client and you qualify for a MCC, my team will help you process the necessary documents, along with your mortgage paperwork to make sure you get your tax certificate. So, if you have not owned a home in the previous three years and your income is not more than a 75K to 85K, you may be eligible. And most types of homes qualify too; new and existing single-family homes, duplex, town homes, condominiums and manufactured homes are eligible properties.
To be fair, there are a few details you will want to be ready for. In addition to the added paperwork, sometimes getting the seller to sign the forms can be difficult – especially when that seller is a bank. There is a $250 fee, which is easily recouped by the first year’s tax credit. And there is a miniscule chance that if you sell the home within 9 years you could have to pay a recapture fee. I won’t attempt to detail how recapture works, but here is a good breakdown provided by National Homebuyers Fund (Click Here). In my 10+ years in the business none of my clients have ever had to pay recapture, but it is a good idea to read the fine print.
On a personal note, I don’t make any additional commissions or referral income for helping my clients get a MCC. Yes, they can be a little laborious, but I would be doing my client a disservice by not sharing this opportunity with them. If you are one that likes to clip coupons, get that 2 for 1 sandwich deal at the local deli, then a MCC is worth a few minutes of your time.
IMPORTANT DISCLOSURE – The MCC Tax Credit will vary considerably depending on the MCC Program, state, county, or city and the amount of the homebuyer’s loan, their interest rate and the term of the loan.