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Interest-Free Home Loans Up to $7,500 Await Disciplined First-time Homebuyers

Beth Orenstein
LoanBiz Columnist

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A Good Deal for First-Time Buyers

The federal government is offering first-time homebuyers a good deal. They can get a zero-interest home loan for up to $7,500 if they buy a home soon. The offer designed to encourage home sales and stimulate the slumping housing market is contained in the Housing and Economic Recovery Act of 2008 signed into law in July.

Under the new law, the incentive is called a tax credit because it allows some first-time homebuyers to deduct 10% of the purchase price up to $7,500 from their 2008 income taxes. But in reality, the tax credit is an interest-free loan because the credit must be repaid over time, says John D. Rossi, an accounting professor at Moravian College in Bethlehem, Pennsylvania.

An Interest-Free Home Loan "Always a Good Deal"

Still, Rossi says, it is a good deal because it is interest free. "An interest free home loan is always worth it if you have it available to you," he says. "If I were already thinking of buying a home, I would take advantage of this offer. You'd be crazy not to."

Chris Rocks, executive director of the Credit Advisory Alliance in Palatine, Illinois, agrees: "Even though the tax credit needs to be repaid over a 15-year period, it's still helpful in offsetting the increased down payment requirements that have resulted from lenders tightening their underwriting guidelines."

To Be Eligible, Home Loan Buyers Must Follow Rules

Not surprisingly, the home loan/tax credit has tight eligibility requirements. First, homes must be purchased on or after April 9, 2008, and before July 1, 2009.  Second, only single taxpayers with incomes up to $75,000 and married couples with incomes up to $150,000 qualify for the full tax credit. Those with higher incomes may be eligible for a partial tax credit. Finally, almost none of the buyers can have owned a home within the last three years (displaced homemakers and single parents who owned their previous home with a spouse are exceptions, as are those who owned mobile homes not considered real property).

Those who claim the credit in 2008 must start repaying the home loan in increments when they file their 2010 returns. A homebuyer who claims the full $7,500 credit would repay the credit at $500 a year for 15 years. If the homeowner sells before all of the credit it returned, he or she will have to repay the remaining credit from the proceeds of the sale. However, if the home is sold and there is not sufficient profit, the remaining credit payback is forgiven.

Homebuyers Should Be Prepared to Repay the Tax Credit

While financial experts believe the first-time homebuyer tax credit is a good deal, they say only those homeowners who will be able to repay it should consider it. "If you can't pay it back, you could be subject to tax penalties, and that could make things worse," Rossi says. "If you can't pay it back, it could convert a free loan into a very expensive loan." Adds Rocks: "It's really important to properly plan for the repayment of the credit."

Home Loan Could Help With Down Payment

Prospective homebuyers who will qualify for the tax credit can use it to accumulate cash for a down payment or to offset the cost of obtaining a fixed or adjustable rate mortgage. This is easily done by reducing tax withholding (by filling out a form W-4) up to the amount of the credit for which they will be eligible. Their take-home pay would be higher and they could set aside the extra money for their home purchase. However, Rossi says, only those who know they have the self-discipline to put the money aside for a home should even consider taking this approach.

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About the Author
Beth W. Orenstein, of Northampton, Pennsylvania, is a freelance real estate writer. A graduate of Tufts University, she majored in English.

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