By Danielle Hale, Research Economist
Buy a home and you get a tax break! As part of the Housing and Economic Recovery Act of 2008, a First-time Homebuyer Tax Credit is now available. However, this limited-time tax break ends in mid-2009. A homebuyer tax credit has been available for first-time homebuyers in Washington, D.C. for many years, and now first-time homebuyers nationwide can take advantage of a similar benefit. In this commentary, I'll give a quick overview of the credit-something every Realtor® should know. For further details, you can consult a longer PDF available here (328K PDF) or consult a Q&A put together by NAR's government affairs team (161K PDF). A brochure for Realtors® to give to clients interested in the provisions of the tax credit will be available here in late summer. For more information about the brochure, contact Thomas Doyle at tdoyle@realtors.org.
First-time homebuyers who purchase a principle residence on April 9, 2008 and before July 1, 2009 are eligible for the credit. A first-time homebuyer is someone who has not owned his/her principle residence for a 3-year period before the date of purchase, and someone who has never taken advantage of the DC first-time homebuyer credit. In the case of married couples, both must be first-time homebuyers. For other groups purchasing a home, the statute is unclear. Purchasers should consult a tax advisor.
The credit directly reduces the total amount of taxes owed and is refundable. When the buyer files his/her taxes, for the year he purchased his home (2008 or 2009), he will be able to subtract the amount of the credit from his Federal income tax liability, increasing his refund or reducing the amount he owes.
The tax credit is equal to 10% of the purchase price of the home up to $7,500. The full credit is available for single buyers whose adjusted gross income is less than $75,000. If the buyer's adjusted gross income is greater than $75,000 and her home purchase qualifies her for the full credit, the credit phases out according to the chart below.
For married couples filing jointly, the credit begins to phase out at an adjusted gross income of $150,000 per this chart.
The tax credit is not completely free money for buyers to keep. It has a payback provision that makes it similar to an interest free loan. Two years after the credit is claimed, buyers begin repayment so that the credit is paid back in full over the course of 15 years. For those qualifying for the full credit, the payback amount is $500 per year. Those getting less than the full credit pay equally over the 15 years (which is a rate of 6.67% per year). If a qualifying home is resold before the credit is repaid, the seller will have to immediately pay the outstanding balance of the credit. If the home is sold at a loss, then nothing more is owed.
Money today is worth more than an equal amount of money in future, which economists call the time-value of money. First, money loses its purchasing power over time due to inflation. Second, you can use the money today to earn interest and repay the principal later-all the while keeping the interest for yourself. For this reason, multimillion-dollar lottery winners prefer taking a lower lump-sum amount than the multimillion dollar amount spread out over many years. Real examples in the PDF will help you illustrate this point to potential buyers.
For more specific questions about the tax implications of the credit, please consult a tax professional.
Buying a first home is a big step. Fortunately, Realtors® are willing and able to help buyers through the process. In addition to the many benefits of homeownership, the homebuyer tax credit and more affordable prices make now an especially opportune time to purchase for the buyer who is mentally and financially prepared for the commitment.
Good Morning!
The Fed is making it clear that they think Mortgage Rates to consumers are too high relative to Treasures. The last time we had rates (Treasuries & MBS) this low was back in 2003-2004, when the 10Yr Treasury bottomed out (in Yield) at 3.11 on 6/13/03, and the Fannie Mae 30y 30 day commitment (FNCR3030 on Bloomberg) bottomed out @ 4.66 for a spread of 1.55. Currently this spread is 2.53, which is 98BP wider then it was in 2003. Many things have changed over the last few years, with the current economic and housing situation looking worse then they did in 2003. The potential impact on mortgage rates could be tremendous.
Are you ready for mortgage rates to fall ??
(Data and commentary provided courtesy of Rob Branthover @ MIAC)
US Treasury and Fannie Mae Commitment Spreads
6/13/2003
10/31/2008
11/24/2008
10Yr Treasury
3.11
3.95
3.19
FNCR3030
4.66
6.30
5.72
Spread
1.55
2.35
2.53
6/03 to 11/08
0.98
Fed Commits $800 Billion More to Unfreeze Lending (Update2)
2008-11-25 14:36:32.850 GMT
(Adds Fannie-Freddie bond trading and investor and trader
comments from seventh paragraph.)
By Scott Lanman and Dawn Kopecki
Nov. 25 (Bloomberg) -- The Federal Reserve took two new
steps to unfreeze credit for homebuyers, consumers and small
businesses, committing up to $800 billion.
The central bank will purchase as much as $600 billion in
debt issued or backed by government-chartered housing-finance
companies. It will also set up a $200 billion program to support
consumer and small-business loans, the Fed said in statements
today in Washington.
With today’s announcement, the central bank is starting to
use some of the unorthodox policy tools that Chairman Ben S.
Bernanke outlined as a Fed governor six years ago. Policy makers
are aiming to prevent a financial collapse and stamp out the
threat of deflation.
“They’re trying to put funds into the system, trying to
unfreeze these markets,” said William Poole, the former St.
Louis Fed president, in an interview with Bloomberg Television.
“Clearly, the Fed and the Treasury are beginning to take a large
amount of credit risk.”
The Fed will purchase up to $100 billion in direct debt of
Fannie Mae, Freddie Mac and the Federal Home Loan Banks and up to
$500 billion of mortgage-backed securities backed by Fannie,
Freddie and Ginnie Mae, the statement said.
Help for Housing
“This action is being taken to reduce the cost and increase
the availability of credit for the purchase of houses, which in
turn should support housing markets and foster improved
conditions in financial markets more generally,” the Fed said.
Fannie and Freddie bonds rallied. The yield premium on
Fannie Mae’s five-year debt over similar-maturity Treasuries
tumbled 21.5 basis points to 114.7 basis points as of 8:35 a.m.
in New York, according to data compiled by Bloomberg. A basis
point is 0.01 percentage point.
“The cheaper that they could issue their debt, the more
aggressively they should be able to buy mortgages in the
secondary market,” said Alan Bosworth, director of agency
trading at Vining Sparks in Memphis, Tennessee.
Separately, under the new Term Asset-Backed Securities Loan
Facility, the Fed will lend up to $200 billion on a non-recourse
basis to holders of AAA rated asset-backed securities backed by
“newly and recently originated” loans, such as for education,
automobiles, credit cards and loans guaranteed by the Small
Business Administration, the Fed said.
Commercial Paper
The ABS program is similar to the Fed’s effort to bring down
the cost of financing for commercial paper, the short-term debt
companies issue to finance payrolls and other expenses, because
it goes beyond banks.
“What the Fed has been trying to do is get a sense of what
works and what doesn’t work,” said Derrick Wulf, who helps
manage $70 billion in mostly fixed-income assets at Dwight Asset
Management Co. in Burlington, Vermont. “One of the things that
has worked is the commercial paper facility.”
Wulf added that “it can certainly improve credit conditions
for consumers.”
The Treasury will provide $20 billion of “credit
protection” to the Fed in the lending program, using funds from
the $700 billion financial-rescue package. The Treasury said in a
statement that the facility may expand over time and cover other
assets, such as commercial and private residential mortgage-
backed debt.
‘Continued Disruption’
On the ABS facility, the Fed is trying to avoid having
“continued disruption of these markets” that would limit
lending and “thereby contribute to further weakening of U.S.
economic activity,” the central bank said.
Under the new lending program, known as the TALF, the New
York Fed will auction a fixed amount of loans each month for a
one-year term. Assets will be held in a special-purpose vehicle
to be created by the Fed. The program will stop making new loans
on Dec. 31, 2009, unless the Fed Board of Governors extends it.
Lenders providing credit under the TALF “must have agreed
to comply with, or already be subject to,” executive-
compensation restrictions in the October bailout law, the
statement said.
The Fed will start buying the direct debt of government-
sponsored enterprises -- Fannie, Freddie and a dozen federal home
loan banks -- through primary dealers in government debt from
next week. The purchases of mortgage-backed securities will be
done through asset managers, and officials aim to begin the
effort by year-end.
Purchases of both types of debt “are expected to take place
over several quarters,” the Fed said.
Thank you.
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