First-time home buyers are now eligible for a tax credit of up to $7,500 under the U.S. Housing and Economic Recover Act of 2008.
To qualify for the tax credit, purchasers must close on a home between 09 April 2008 and 01 July 2009. Married couples with incomes up to $150,000 qualify for the full tax credit, as do single taxpayers with incomes below $75,000. (Those with higher incomes may be eligible for a partial tax credit.)
The tax credit is equal to 10% of the home’s purchase price, but is capped at $7500:
- If you purchase a $60,000 home, you qualify for a $6000 tax credit.
- If you purchase a $75,000 home, you qualify for a $7500 tax credit.
- If you purchase a $90,000 home, you qualify for a $7500 tax credit.
There’s one huge caveat to this program: This tax credit isn’t really a tax credit — it’s an interest-free loan from the U.S. government. From the FAQ at National Association of Home Builders mini-site:
Home buyers will be required to repay the credit to the government, without interest, over 15 years or when they sell the house, if there is sufficient capital gain from the sale.
For example, a home buyer claiming a $7,500 credit would repay the credit at $500 per year. The home owner does not have to begin making repayments on the credit until two years after the credit is claimed. So if the tax credit is claimed on the 2008 tax return, a $500 payment is not due until the 2010 tax return is filed.
If the home owner sold the home, then the remaining credit amount would be due from the profit on the home sale. If there was insufficient profit, then the remaining credit payback would be forgiven.
Does it make sense to take this tax credit if you qualify? Shawn wrote yesterday looking for advice: “I recently bought a house and was informed about this ‘tax credit’. It turns out that I am eligible. Do you think it would be a good idea to take advantage of this?”
We’ve been taught to be wary of anything that seems too good to be true. Still, I can’t think of a reason not to do this if you can. You’re basically saying, “Okay, I’ll pay the government an extra $500 in taxes for the next fifteen years in exchange for them giving me $7500 now.”
Would you take this tax credit? If you’re thinking of buying a home, does this program influence your decision?
Note: If you’ve considered buying a home but don’t know where to start, check out the U.S. Department of Housing and Urban Development’s common questions from first-time homebuyers. This document provides excellent information about the homebuying process.
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Do you know if there are limitations to taking the “credit” (e.g., what the money is used for)? I thought that I might could pay off some debt using this money. It would make a lot more sense doing that than to continue scrimping to pay my credit cards and compounding interest each month. This would be a good way to pay them off without owing interest.
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I’ve considered the purchase of a home for this very reason. I hadn’t heard of anybody who has taken advantage of the credit yet, but it would allow me to completely eliminate one of my debts, getting me down to only 2 debts left to pay off (besides that one). Sure it will increase my problems every April 15, but I can even change the amount withheld at work, and pay it back over the year…
To be given $7500 at 0% interest, and repayable over the next 15 years? I think it is worth the trouble, just to save the interest…
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“If there was insufficient profit, then the remaining credit payback would be forgiven.”
Whatever you do, don’t use the credit to pay down your mortgage. I bought a house on April 18th of this year (well before this credit was announced, and just 9 days within eligibility). I plan on using it to increase my emergency fund. Who wants equity in a home right now?
On another note, will the government come up with some incentive for people to continue paying their mortgage? With all this talk about mortgage rewrites and stopping foreclosures, I question why I’m still sending in the check every month.
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I just bought a house (closed on Aug 27th) and we are TOTALLY taking that credit, and using some to pad our emergency fund and some to pay off debts. If it’s interest free, then there is absolutely no reason not to take it, since my $500 in two years and for the 15 after that will be worth less than that $500 (and the 15 other $500′s) in my hands now.
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Having just purchased my first home this summer I’m absolutely considering this.
After a few years of saving for the down payment, and stretching a bit more when I finally wrote that check, a couple grand is not as easy to come by. About half that amount will actually bring the house back to tip-top shape in my case plus a new appliance or two, and I can safely invest the rest and pay it back at a comfortable pace… I can even try to make a couple extra hundred on it while I pay it back.
Course… option 2… I’m taking it to Vegas to throw it down on Red 14 and Black 20. Yahtzee!
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We bought a house at the very end of January, so we missed this by 2 months. If we *had* been eligible, I’d totally do it and, just as other people said, stick the whole amount in an interest bearing account as a supplement to our emergency fund.
Do the $500 payments just get added on to the tax bill, or are they figured separately?
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We’ll be purchasing a house very soon and plan on taking the credit.
Because we don’t quite have enough saved for the 3.5% down required, we’ll be using the tax credit to pay back family we borrow money from for the down payment.
That’s assuming we find our dream house sooner rather than later. Otherwise, we’ll just keep saving for the down ourselves.
But, either way, I’m taking it. If we don’t get into a house until closer to July, we’ll just use that money to knock down (out really) some debt.
Either way, it’s a win for us!
(note: Required down payment was 3.0% up until Oct. 1, 2008, when H.R. 3221, the Housing and Economic Recovery Act of 2008 took effect. H.R. 6694 is a bill before the House currently, with designs to amend that to make some exceptions. Google that bill and look it over. I support it.)
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I really don’t see any significant downsides. If you normally owe taxes at the end of the year, you are going to be owing about $500 more… if you normally get a refund, you’re going to get about $500 less.
Regardless, $7500 now outweighs either of those if used wisely.
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I already own a home so we wouldn’t qualify, but I did qualify I would take it, gladly, I just wish they had thought of this sooner.
Of course I also think it could potentially get some into trouble, the last person you want to be in debt to and not have the money to repay is Uncle Sam.
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I would take it, too bad we bought 6 years ago. I would put it in a savings account or use it to fully fund IRA’s (better taxes yet) and then repay.
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Question on this as all I’ve done is read the article. Is this just a $7500 credit to your taxable salary for one year or is this $7500 that you get back from the govt at tax time in addition to anything you’d get back or have to pay? If it’s simply a credit since I’m in the 25% tax bracket all I’d see is $1875 and be paying the govt. $7500 over the next 15 years. If it’s $7500 for $7500 over 15 years then yes that would influence my decision. Does anyone know the nitty gritty of this?
Edit: For anyone wondering the FAQ section listed in the article defines a tax credit. If you paid $7500 in taxes and you take a $7500 tax credit you owe nothing to the govt. If it’s a tax deduction (which this isn’t) you can only subtract that amount from your taxable income. If you get money back from the govt already for your tax return this would simply add another $7500 to it.
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I was planning on not taking it, figuring it would be one more debt to pay down…but at that point I was thinking of it in a vacuum from my other finances. Now that I realize I could practically pay my car off with it…I think I’m gonna do it!
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There are no restrictions on what you can use the money for, that’s the point. They want to encourage people to put their money into the housing market and likewise spending that credit on consumer goods a lot like the stimulus payment.
Even 3% interest in a high-yield savings would pay about half of the $500 a year repayment.
I’m just gonna let it sit if possible.
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Amanda and I must think alike…
The present value of $500 paid to the Government 17 years from now (at a 5% discount rate) is $218.
Flip it around for another perspective: If the Government gave the same loan but with a 5% rate, you would be paying $1,146 in year 17 to repay that $500 chunk.
Obviously this loan is a win. I am thinking of buying by July. I would probably use the loan to get my down payment up to 20% LTV.
Thanks for the reminder! I had heard about this and then forgotten it.
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I wasn’t planning on buying a house this soon, but I may just have to take advantage of this opportunity. Even if I took the 7500, put it in an ING 24 month CD at 4.25, When it comes to pay it off in 2 years, the first year’s payment will have been earned from the ING account!!! (Ok, I realize it won’t truly be, since I’ll need to pay tax on the interest earned, but please don’t spoil my moment of happiness figuring that out)
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I wouldn’t take it. I’m already debt free so I’d basically be going $7500 in debt to the government for no reason.
If you have debt you might want to take it as a transfer to 0%, but that’s dangerous unless you pledge to stop using whatever card or cards you pay off.
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So those of us who bought first houses in 2007 – at the very peak of the market – don’t get anything, right?
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It is a tax credit. Like the child tax credit.
That means you have to owe $7500 in taxes to get the full $7500 credit. Many people don’t owe that much “federal” tax because it equates to a taxable income of over $50,000.
Regardless, it is an interest free loan with nice repayment options and I would consider it if I were buying, but I don’t think nearly as many people will qualify for the full amount as they think.
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Anyone know the odds that this will be extended?
I’m planning to buy, but probably won’t make it by the deadline.
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Could someone please direct me to the $60,000 homes aisle? Thanks, I can’t seem to find it. All I can find are the $300,000 and up homes.
(Thanks Congress, out of touch much?)
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My wife and I closed in May and we will definitely take this. We are expecting about 9000 back with this and our expected refund. We will probably use 4000 for putting on our deck and some other projects and put the rest in savings, CDs, and IRA and just gain interest and pay back the loan with future cheaper dollars!
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It makes sense to take advantage. I hope all of you do really smart things with it, as I will be paying the taxes that make up for your windfall. One of the things they did to pay for it was retract the 2/5 year rule for capital gains (a house lived in for two of five years of ownership owes no capital gains upon sale). Which means the house I rented out for two years with the intention of selling suddenly has many thousand dollars more taxes owed. If Congress changes the 15% tax rate back to what it was before that number is going up up up.
So please, since they’ve already taken it from me, use it wisely.
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I’m starting to feel a little shafted. . .It sounds like irresponsible lenders are getting off the hook, irresponsible borrowers may be getting off the hook, but what about the responsible borrowers? Sounds to me like we get to pay for all of it out of our taxes. . .
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I haven’t looked at this enough to know (cause hey I bought 3 years ago and am only $75k underwater!!) but a lot of credits you can claim even if you have no tax liability, you don’t need to owe at least $7500 or anything. If you do take it you should probably invest the money, it’s a loan, not a freebie.
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I’ll have to look into this, but since we were already planning on buying during that time we might as well. Seems completely counterintuitive that the government is actually letting us do what we believe is right with our money instead of them doing what they think is best with our money.
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I have no clue how to feel about it.. on one hand angry because we closed on our house in late March of this year, which puts us just barely out of the eligibility range. On the other hand… I am trying REALLY hard not to take on any additional debt, of ANY kind, right now. And we might want to sell this house in the next two years, if the market is good, and equity built up in the next 2 years would be negated by having to pay the $7500 back. It all seems kinda screwy to me (but then again I don’t claim to fully understand the fine print!)
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I purchased my first home last month, and I am eligible for this tax credit. I plan to take it and put it in an interest-bearing account (probably CDs), pay it back from that account, and pocket the interest. I think an interest-free loan is too good to pass up, but I would be careful about spending that money, because it does have to be paid back!
The other possibility is putting the money towards my mortgage, and considering the $500/year that I’m paying back to the government as an extra $500/year payment on my mortgage. If I make an extra $500/year mortgage payment for the next 15 years, I will save ~$11k in interest, but if I make one extra $7500 payment next year, I will save ~$30k in interest (assuming I’m calculating correctly).
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This is crap! Rewarding the people who already got a good deal after the bubble burst this last summer? I’m not someone who believes that all these ARM people should be bailed out at all – but am I wrong here or do I not see who this is supposed to help? The people who did manage to get a loan over the last six months must have pretty good credit and down payments in order to have even qualified – so now we are not only helping out the people who screwed themselves with an ARM, but now we are giving some huge rebate to people who bought when the market was low? They sound like they are doing fine to me – yet we are giving out just bunches of free money yet again?
I’m with some of the earlier posters – I don’t know why I am even bothering to pay my mortgage! Lately it seems the only time I get screwed is when I do something responsible!
We bought a house in July 2007 and we couldn’t get our states credit towards it on our taxes because we hadn’t lived there for a whole year yet. And now we are being punished because we have lived there for more than a year?
No wonder our economy is going in the crapper….
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A few thoughts:
First, the tax credit is refundable, meaning you don’t have to owe any taxes to get the $7500 from the government.
Second, I can understand people’s desire not to have outstanding debts, but Sara’s idea above is perfect for you – by simply applying the $7500 to your mortgage principal as soon as you receive it, you will save potentially thousands of dollars on your mortgage. And this would have no increase in your level of indebtedness. Personally, I would most likely invest the $7500 in stocks as they are much more likely to return more than the interest rate on your house, but I can understand the desire for certainty. In no case, however, can I understand people being eligible for the credit and not taking it. It’s a fantastic deal.
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We bought a house in September and qualify for this credit. We asked our mortgage broker if we should use the money to pay down our mortgage or use it for consumer debt (we have about $4,000 in debt) and he said: without a doubt, do not pay down your mortgage – reduce your consumer debt with this loan. It’s a 0% loan so you should use it on your highest interest debt (which is likely to be credit cards and not your mortgage). He said if there was money left over after you pay off your consumer debt (in our case, there will be) to spend it on the house – fixing things identified in the home inspection.
I hope no one thinks this is a handout — this tax credit makes it much easier for first time homeowner to afford the typical expenses of first time ownership. It’s not as if home equity loans are even going to be available right now to fix things like roofs or basements. And this is certainly not a bailout for ARM mortgagees.
Those of us who bought in the last six month had to put more money down, endured tremendous vetting from underwriting, and had our home appraisal scrutinized. We personally spent over $2500 in inspections and appraisals to even get our loan — not to mention our down payment. I think this tax credit is an incentive to help offset the new high costs of mortgage borrowing.
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Ha. Shawnimal’s comment made me laugh out loud, so it’s marked as a favorite.
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We don’t have this in Canada, but we’re allowed to withdraw up to $10,000 from our RRSP (Registered Retirement Savings Plan) to use towards the downpayment on a home ($20,000 max for a couple). Normally, you’d pay taxes on the money when you withdraw it but this is tax free, so long as you repay it within 15 years (1/15 of it at a time).
I took advantage of this more than a decade ago when I withdrew $7,200 to use as a downpayment on a small condo. I’ve been repaying it (to my RRSP) at the rate of $10/week.
Was it a good move? I bought the condo in 1997 for $96,900 and sold it a little less than 2 years ago for $176,000. I’m happy, even though I realize that the lump sum I withdrew would have earned interest in the intervening time, plus I would now have more money in my RRSP (assuming that I continued to contribute). I sure wouldn’t have $71,100 more though! Plus, I had a place to live for under $800/month including my mortgage payment, property taxes and strata fees. That’s a tremendously good deal in one of the most expensive cities to buy in worldwide (third, behind London and NYC according to a blog I read today).
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I purchased a house April 17 not knowing about the credit but I definately am TAKING advantage of it. I have already opened up a CD for $7,500. Each year, I will pay back $500 and at the end of $15 years I will have some extra money. Did I NEED this credit, no, will I make use of the US governments money to earn a little money, SURE.
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We just purchased our first home a few months back and are going going to be very glad to get this tax credit.
We are going to finish replacing our windows in our condo and then use the rest of the tax credit for new appliances, some work on the kitchen, new floors, and painting.
Our goal is to flip the house in a few years when the market is back up on the upswing.
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They’ve copied this from the Australians who introduced a similar scheme over five years ago. The difference is that the Aussies give you cash rather than just a tax credit.
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I’m eligible for the credit, and will most likely be taking it. However I’m not really going to do anything with it. We love the house we were able to purchase, but our commutes are somewhat far (mine is 30 min, hers is 50 min). If we sell the house 2-3 years from now, that $7000-$7500 must be liquid and available to pay back, and when you sell, you still have to overcome the previously spent cost of buying the house you were in ( )plus the cost of selling it in order to make any profit. If that credit is spent on a liability like a new car or furniture, its another cost that must be added in and overcome during sale before making any profit. At least thats my philosophy. So take the credit, let it sit in the bank, think of your bottom line as in the same place before the credit, be happy about it, and don’t spend it.
Oh one more thing, we closed on our house before this credit idea even came to life (May 08). Sellers now know that the first time buyers will be receiving this credit, and may artificially keep the house price at least $7,500 higher than what they want for it or may be less likely to come down in price, which is something we didn’t have to worry about.
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As an accountant who works in a CPA firm, I can tell you that this would be like any other 0% interest loan for $7,500. Take the loan if you know you can pay it back and can get a greater return on your investment than the cost of the loan.
If I were eligible and in the market for a house (I’m neither), I would take the loan if I knew that the resulting $500/year decrease in future spendable income wouldn’t affect my abilities to live comfortably and repay my debt. Most first-time homebuyers are strapped financially, so if you don’t want to all of a sudden have your net spendable income decrease by $500/year, it may not be a great idea.
It’s seems the effect on one’s personal financial world would be kind of like the adjustable rate mortgage … it lets you buy a home easier, but then those darned rates go up and you can hardly afford to stay in your home (and isn’t that partially what caused this housing mess in the first place?!?!?).
An additioanl $500/year obligation is only $41.66 extra per month and most folks will be able to afford that, HOWEVER isn’t this the “buy now pay later” mentality of credit cards that we readers here on GRS blog are learning to avoid?
I’m a big advocate of homeownership, and if this loan let’s some young folks get into a home sooner and they’re able to continue the payments, I’m all for it, but I would strongly suggest that ALL folks considering this “tax credit” realize that it can be a great opportunity, OR it can potentially strap you short of cash down the line, IF you are unaware of the consequences and don’t properly prepare for that extra $500/year tax bill.
(Just throwing out my financially-conservative $.02)
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Is there any way to pay this off other than the $500. they say per year? I took the $7500. and now am paying this back.However, it is not $500. per year it is $253. quuarterly.
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I just have to laugh about a few things:
1) It’s 10% of the home value up to $7,500. I wonder how congress negotiated exactly that amount.
2) Who wants to have to keep track of a 15-yr loan to the government? It’s now probably going to be another line on the already-growing 1040. Fun.
I don’t loan the government money interest-free, and I wouldn’t borrow it from them interest-free either.
Would you take this loan if it were from your parents so you could get into your house? From the bank?
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Hm. I have a hard time understanding how paying off debt with a loan is paying off debt. Except insofar as it gets you out from under high interest such as credit card debt. IF your house gains in value (and it will be quite a long time before that happens again), you’ll have to fork the equity gain over to the government when you sell. This means you won’t have whatever equity your house might have built to help you buy the next dwelling. And since real estate appreciates all the way across the board, if your $90,000 house is worth $100,000 in ten years, you won’t be able to move into a comparable home–you will have to move DOWN in quality of construction, location, or safety of the neighborhood.
Explain to me again how this is a good deal?
Being the ungenerous old miser that I am, I’m beginning to feel shafted all the way around. I bought one house before the bubble started to inflate; copurchased a second when we thought (wrongly!) prices had about bottomed out, and now am looking at two houses that aren’t worth what we paid for them. Meanwhile, 18 months from retirement I’m watching my retirement savings melt away. Okay, so it’s lucky I don’t carry credit card debt and at least one of the two houses is paid off…but…
Meanwhile the other thing I’m watching is people who got themselves up to their noses in debt and predatory lenders who got obscenely rich on those folks all walking away from this mess scot-free, while I and people like me, who stupidly plodded off to work each day and managed our finances frugally, are left holding the bag.
The woman who bought my last house made a conscious decision not to get a job, not to work at all. She extracted $340,000 worth of fake “equity” from a house worth around $200,000, lived on it for several years, defaulted on the loan, and, when the bank unloaded the house on a short sale, walked away debt-free. The jerk across the street hasn’t held a job in years; when he defaulted the bank foreclosed on a $320,000 loan and practically gave the house away–the bottom-feeder who picked it up for under 50 cents on the dollar is selling it for $68,000 less than the last foreclosure brought, or for about $100,000 below the prevailing market value in this neighborhood. That pushes the value of my home below what I paid for it BEFORE the bubble.
Since it’s unlikely housing prices will come back to pre-bubble normalcy in my lifetime, I’m left wondering…how many of these $7,500 loans will we taxpayers have to forgive?
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On the subject of qualifying, the FAQ says this:
What is the definition of a first-time home buyer?
The law defines “first-time home buyer” as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, **if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit.** Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
Per the line I marked with ** – my husband owned a home ten-twelve years ago. This FAQ doesn’t specify, to me, that we would then qualify for this tax credit (I’ve never owned a home). I would assume that we would, given it’s been more than 3yrs since he owned a home, but I try not to assume things when it comes to the gov’t
Can anyone decipher this better for me?
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We’ve changed our minds. Rather than paying off our car, we’re going to use the money to convert our half bath (in our 3/1.5 house) to a full bath to increase the value of our house by at least 7500. I can do a lot myself and can get materials at a discount so I can probably get a 10,000 bathroom for 7500. Average ROI for bathroom remodel is 90% so we should see a $1500 return and have a more usable bathroom.
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At the very simplest level, not factoring in inflation, assuming you would otherwise borrow the $7500 for 15 years at 7% and pay off this $7500 first:
you would save at least $1410 in interest over the life of the loan.
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I don’t see that anyone has mentioned yet one Very Large Factor to consider when taking out this “loan.” Great, it’s at 0% interest, but your creditor is the Federal Government, and those guys do *not* screw around. If you have some kind of emergency in the future that depletes all your savings, they will garnish your wages. If medical bills suddenly send you into bankruptcy, they do not care. Tax debt is excluded from bankruptcy filings.
I’d rather have Citibank after me than the feds any day. At least there’s some kind of higher authority to appeal to if you don’t like how Citibank treats you. I know those emergency scenarios above are unlikely, but the risk of being hopelessly indebted to the IRS just isn’t worth it. I’d like them to be much LESS involved in my finances, not much MORE.
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Can someone answer this one? On the “First Time buyer” – Loan, it is defined that a first time buyer can not have owned a primary or main residence in the last three years. In 2004 I seperated from my wife and I moved out and had a lease on a rental property that became my primary residence. I still was required to pay the mortgage on the home during the divorse and later ended up loosing the house to my ex in the divorse. The house was refinance without my name and I signed over ownership. Since this was not my residence since 2004 and can prove with utility bills and lease would I qualify for the $7,500.00?
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I am in the process of buying a new house (well, condo, but it’s still property). and I am DEFINATELY taking advantage of this. I am replacing the windows before I move in. Also I don’t have a fridge or stove. This will help out greatly with that. The rest I’ll probably let sit in savings for emergencies. I could put the rest towards one of my CCs but rebuilding an emergency fund–which I’m using now as a down payment–is more important.
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Figures, I wait years to buy a house, save my money, graduate college, pay off debt and get together a down payment all while working two jobs to make sure I could do it all. Those two jobs are going to make me not qualify because it’ll put my combined income just above the limit.
Seems like if you wait to buy a house while your career develops and work a lot, you get screwed, rush out and buy a house with lower income and get a reward.
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Juncti, sounds like you don’t need the help!
You seem way ahead of the game, not screwed.
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I’m taking the money.
Granted, there are stupid things you can do with the money. Don’t do any of those. Gambling, new flat screen TV, new car, etc.
Seriously, it’s 0% interest. Forever. There’s lots of ways you could do something *very* intelligent with it.
Paying down debts.
Fixing up your house (small remodeling project).
Building up your emergency fund.
Max out your Roth IRA.
Some of these include risk.
I didn’t want to factor this cash into my house search, because you don’t really want to try to afford a house bigger than you can afford (if that makes sense). A $100k loan is still cheaper than a $107.5k loan.
I personally plan on using it to pay down my mortgage. Why? Because a few tweaks on my payment plan, and I will own my house in 10 years. For the next 5 years, my costs would be just the usual overhead of homeownership plus $500/yr, and that large pie piece on the personal budget chart shrinks to a sliver.
#43 has the simple insight into this one.
#39 asks: “Would you take this loan if it were from your parents so you could get into your house? From the bank?”
This misses the point of taking the loan. No, it’s not so I could get into the house, but I’ll take a 0% loan when it’s offered to me. I see *possible* caveats, but it’s so abysmally low on the risk scale that I’m having to invent things to dissuade me.
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I’m annoyed by their eligibility timeline. I just closed on my house in January. I know that the intent was to encourage new buyers, but I don’t see why they couldn’t extend it back to January if they’re already going back to April.
That being said, if I could take it, I would. It’s a 0% loan. Plus I plan on increasing my income every year, so the $7500 would mean more to me now than the $500 I’d spend in subsequent years to repay it.
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