SANTA CRUZ (January 25, 2009) - Last year Congress passed the Housing Assistance Act of 2008 to help promote homeownership. This Act provides qualified first time homebuyers who buy a home between April 9, 2008 and July 1, 2009 a tax credit of up to $7500. A first time homebuyer is anyone who has not owned a principal residence in the past three years. Single taxpayers who make less than $75,000 or married couples who make less than $150,000 qualify for the full tax credit. This tax credit is essentially an interest-free loan that must be paid off over 15 years. Anyone interested?

A tax credit is granted by the government and reduces the amount of federal income taxes owed. For example, if you owed $7500 or more in federal income taxes at the end of the year, this tax credit would wipe out $7500 in taxes due and you would not have to pay any income taxes this year. If your employer had deducted $7500 or more over the course of the year, the taxpayer would get a refund check of $7500 from the IRS.

Unfortunately, this $7500 does have to be paid back but it does work like a loan that accrues no interest over its 15 year term. In other words, $500 per year in payments will have to be made until the $7500 is paid back or the home is sold, whichever occurs first. If there is not sufficient profit from the sale of the home, the debt is forgiven. Payments do not start until two years after the date of purchase.

This portion of the bill is designed to encourage prospective homebuyers to make their move now (April, 2008 - July, 2009) rather than later. Combine this incentive with sellers who are anxious to sell and interest rates at near historic lows and you have a winning situation for homebuyers today. Homebuyers who have purchased a home between April, 2008 and December, 2009 and wishing to take advantage of the credit should be sure to discuss it with their accountant.

The bill was intended to help homeowners as well. While it was expected to help some 400,000 families refinance out of a potential foreclosure situation, enhance mortgage disclosures and provide much needed financial backing to Fannie Mae and Freddie Mac, the reality is that very few homeowners have been able to benefit from these projected benefits. Even the Act’s provision to increase the conforming loan limit in high cost areas like Santa Cruz County to $625,500 has proven to be a disappointment.

The best news of all came when the Fed stepped in earlier this month and began purchasing mortgage-backed securities from Freddie Mac, Fannie Mae and Ginnie Mae. This provided some confidence in the these markets which in turn brought 30 year fixed rates down below 5 percent. Although rates have popped back up to 5 percent, we are still hoping that rates will once again drop down in order to give qualified homeowners an opportunity to lower their mortgage payments.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.