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Feeding your Financial Garden with Mortgage Tax Credit

April 11, 2016

Welcome to the second edition of our series mash up of National Garden and Financial Literacy Month. Haven’t seen the first edition? Read Aquaponic and FinTech: Growing Financial Literacy for First-Time Homebuyers. Today we’re talking about composting and tax credits.

As a first-time homebuyer, it takes a bit of up-front costs to land your own home. Although the Home is Possible program offers up to five percent loan assistance towards a down payment, you may need additional help replenishing and restoring your depleted savings account after closing costs. Lucky for you, we have another program for first-time homebuyers that (like composting) is inexpensive and easy, but is a little less messy than stockpiling tables scraps and egg shells. Instead, the Mortgage Tax Credit (MTC) program involves stockpiling loads of otherwise wasted tax dollars.

Converting Tax Waste into Savings

With the MTC, you can receive a federal income tax credit equal to 20 or 30 percent of the interest paid on your mortgage loan. The 20 percent credit rate is for loans $225,000 and higher and does not have a limit to the amount of credit you receive annually. The 30 percent credit rate is for loans under $225,000 and has an annual credit limit of $2,000.

This averages $2,000 annually for most families and you’ll receive it every year for the life of the loan. What? That’s right. If you qualify, you could receive upwards of $40,000. For free. Sounds a little better than tea leaves and coffee grounds, yes?

Here’s an example of how the MTC works:

  • Loan Amount: $150,000

  • Interest Rate: 4.5%

  • Approximate Annual Interest: $6,700

  • Tax Credit: 30% of mortgage interest

  • Savings First Year: $2,000 (Max $2,000 per year)

  • Savings Over 5 Years: $10,000

  • Total Savings Over Life of Loan: $44,700


  • Loan Amount: $225,000

  • Interest Rate: 4.5%

  • Approximate Annual Interest: $10,125

  • Tax Credit: 20% of mortgage interest

  • Savings First Year: $2,025

  • Savings Over 5 Years: $10,125

  • Total Savings Over Life of Loan: $45,258

The MTC program fee has been reduced to $995, plus your lender may charge up to $300 for the MTC application fee. These are one-time costs and could be covered by your Home is Possible down payment assistance grant if you’re using both programs to buy your home.

Lay the First Straw of Knowledge

Like composting, there are layers to the MTC program. Below are basic program requirements. To find out if you qualify, talk to a lender to get advice on your specific situation.

  • First-time homebuyers (have not owned a home in the past 3 years) or qualified veterans.

  • Households meeting normal FHA, VA, conventional or USDA RD underwriting requirements.

  • Households within the maximum income and purchase price limits.

  • Must live in the home as the primary residence.

  • One-time fees: $995 program fee plus $300 lender application fee.

From Pile to Garden

Okay, so now you have an extra $2,000ish a year in extra money. What do you do with it? Replenish your savings. Bankrate.com explains we all need an emergency savings account – at least $1,000. And this is money that should only be used for a real emergency. It’s also a good idea to have money to live on in the event you lose your source of income, ideally enough to cover three to six months of expenses.

Pay off debt. Bankrate also encourages us to take a look at credit card debt, college debt, or anywhere else where you’re paying high interest. Not paying 27 percent in interest payments could save you thousands of dollars. As you pay off one credit card, put that payment toward another card, and so on. By using a disciplined approach to debt reduction, you’ll be able to start paying yourself rather than credit card companies.

These are just some options for spending your extra money, but first you have to get it. Be sure to speak with your financial advisor to find out what makes the most sense for feeding your financial garden.

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