By David Fialk
RISMEDIA, Nov. 10, 2008-What is a potential home buyer to do? There is widespread negative publicity about the future of real estate values. There is negative publicity regarding the difficulty in obtaining mortgage financing, the problems with sub prime mortgages, home foreclosures and the collapse of financial institutions. They are experiencing an astronomical drop in the value of their stock portfolios. They have concern with job security. Can you blame buyers for slowing down and not rushing into a long term financial commitment, such as purchasing a home?
With that said, there are buyers setting appointments daily to see homes. There are buyers who are in situations where buying a home is a necessity, or is more preferred than continuing to rent. While total sale transactions may be down in many real estate markets, home purchases and real estate closings continue.
The mindset of buyers has changed. There is no reason to rush to purchase a home immediately because of rising real estate values. There is no reason for a buyer to rush into making an offer on a home they just looked at and seemed to like. There are just too many other homes on the market they haven’t seen yet. Maybe mortgage rates will drop? Maybe real estate values will drop further?
So why isn’t there more enthusiasm, more excitement and more publicity in the Realtor community with the $7,500 First-Time Buyer IRS Tax Credit included in the Housing and Recovery Act of 2008?
Throughout 2008, Realtors have tirelessly promoted the benefits of purchasing a home in the current real estate market (favorable mortgage interest rates, lower real estate values, available listing inventory, etc). Where is the effort in promoting the benefits a tax credit like this can be to first-time buyers? Combined with favorable interest rates, a wide selection of homes for sale and more affordable home prices, this tax credit may be just the stimulus and financial assistance many first time buyers need to move forward and make a commitment to purchase a home now, rather than just look at homes and wait for a better time to buy.
The $7,500 First-Time Buyer IRS Tax Credit applies to first-time buyer home purchases of a principle residence between April 9, 2008 and July 1, 2009. It is a tax credit and not a tax deduction. A tax credit is a reduction in income taxes owed! In other words, when a buyer files their income taxes for the year the home was purchased (2008 or 2009), they may be able to subtract $7,500 from the amount of federal income tax liability, which will either increase their tax refund or reduce the amount of tax still owed.
However, this tax credit is not free. It has to be paid back. Repayment begins two years after the credit is claimed, and must be repaid within 15 years. That’s $500 per year. Yes, it would have been much better if there was no repayment provision, but an interest-free loan for 15 years is not such a bad thing, is it? That’s right; there is no interest on the tax credit received.
To help clients understand the tax credit and how it may help them, Realtors need to promote it and know the details. They need to be able to provide buyers with information that is easy to understand. I have provided links to various articles with more detailed information below, including income limits, definition of first-time buyer and more.
While many have questioned the benefit of this type of tax credit, which requires repayment, take a look at the benefits a $7,500 income tax credit provides. More first-time buyers than not leave the closing table and have little left in savings after the purchase of their home. As new homeowners, they are now confronted with a mortgage payment that exceeds what they were accustomed to paying in rent. They have a home to furnish, with more rooms to fill with furniture than their apartment in most cases. They may also need to spend money on painting, some redecorating, carpeting and window coverings. In addition, there are other home ownership necessities such as a lawn mower, ladder, garden tools and the like that must be purchased, not to mention the expense of making any costly repairs or improvements the home may require.
More often than not these purchases are made with a charge card, with interest rates that are upward of 17%. These additional monthly expenses for home-related purchases are in addition to the large monthly mortgage payment they now have. So why wouldn’t a buyer be excited about obtaining the $7,500 tax credit, and having the benefit of repaying it over 15 years without interest?
What if a first-time buyer really liked a home they saw that needed some major repairs or renovation, a home that represented a great buying opportunity? But after much consideration, they decided against buying it. They just didn’t have the financial resources after the closing to accomplish the type of repairs required, such as a new furnace or new roof or new siding or new windows. Wouldn’t the opportunity to obtain $7,500 in an income tax refund possibly be the answer to this type of concern?
Talk about savings. Let’s assume a first-time buyer will have cash reserves after closing and is financially prepared for the purchase of the various items mentioned above. Why would a $7,500 tax credit, which has to be repaid, be beneficial to them?
Let’s assume a $300,000 mortgage was needed in the home purchase at 6.5% interest for 30 years. What if the $7,500 tax credit refund was used to pre-pay the mortgage? Using simple math that would be an annual interest savings of $487.50, just about equal to the $500 per year repayment obligation.
The truth in the matter is that the savings is much greater than the simple math calculation. Pre-paying the mortgage by $7,500 will not reduce the monthly mortgage payment of a fixed rate mortgage. That remains the same. The real benefit is this: The outstanding mortgage balance is reduced by $7,500 and each future mortgage payment results in savings in mortgage interest and increased principal mortgage reduction. With each monthly mortgage payment more money goes to reducing the mortgage balance and less is applied to interest. Together these savings will exceed the $500 cost of repayment of the tax credit. The benefit over the term of the mortgage in interest savings and mortgage reduction will be quite surprising.
What if the buyer prefers obtaining an adjustable rate mortgage or some type of a step down mortgage loan where the mortgage interest rate is lower in the first year and increases in the second or third year? If the $7,500 tax credit is used to pre-pay the mortgage, the new monthly mortgage payment in the rate adjustment year will be lower than it would have originally been as the outstanding mortgage balance has now been reduced by the $7,500 pre-payment.
What if the home is sold prior to repayment of the tax credit? Another provision requires repayment of the balance of the tax credit owed in the event of a sale of the home prior to full repayment. However, special provisions do provide for circumstances where the balance owed is greater than the gain in value or when there is a loss in value. If the gain on the sale is less than the amount owed, part of the balance owed will be forgiven. If there was no gain, or even a loss, then the remaining balance would not need to be repaid.
As a Realtor, I am excited for buyers who are eligible for this IRS $7,500 First-Time Buyer Tax Credit. Qualified first-time buyers should be excited too!
This represents another valid reason why “Now is a Great Time to Buy a Home.” Don’t forget to reach out to past sale clients who may be eligible and closed on their purchase after April 9, 2008. I am sure they would appreciate obtaining information and the opportunity of receiving a $7,500 income tax credit.
Please read the information below:
David Fialk is a Realtor and broker/owner of Choice Realty Co in Iselin, New Jersey. For more information, visit www.choicerealty.com or call (732) 283-2100.
