Homebuyers can save money on their taxes with the Mortgage Credit Certificate. This certificate isn’t automatic. It’s something you have to qualify for and purchase. It’s meant for borrowers in the low to moderate income range. It provides you with a tax credit rather than a tax deduction, which provides greater tax savings.
How does the Mortgage Credit Certificate Work?
The Mortgage Credit Certificate entitles the holder to a tax credit up to a 20% of the amount of mortgage interest you paid for the year. You can obtain the certificate no matter the type of mortgage you have – whether fixed or adjustable rate. It is also available on any loan program including Fannie Mae, Freddie Mac, FHA, VA, and USDA.
The IRS handles the applications for the program. They set the maximum income requirements for the area. Unfortunately, they set one maximum regardless of family size. For example, a family of one will have the same maximum as a family with two working adults. This does make it slightly more difficult for larger families to qualify.
There is an application fee for the program. The fee is non-refundable. If you don’t get approved or you cancel the loan, you forfeit the fee. You can expect to pay between $600-$700 for the certificate.
What do You Get?
If you are approved, you’ll be able to take a tax credit equal to 20% of your mortgage interest paid. Let’s say you took out a $150,000 loan with a 5% interest rate. You’d pay $7,500 in interest. You can take a credit for 20% of that amount or $1,500. This credit comes directly off the income you claim on your tax returns. It directly reduces your tax liability.
You still have the other 80% of the interest you paid. In this case, you have $6,000. You can still use this interest as a tax deduction if you itemize your deductions. This helps lower your tax lability even more. The credit provides a dollar-for-dollar decrease in your tax liability, though. The deduction gives you a percentage of what you paid back.
Increasing Your Income
Some borrowers use the Mortgage Credit Certificate to help increase their disposable income. If you know you’ll decrease your tax lability, you can change your W-4 at work accordingly. You won’t need as many taxes taken out of your check since your tax liability just decreased. Changing your withholding can add money to your monthly checks. You can then use this as a compensating factor when trying to qualify for the loan.
Who Qualifies for the Mortgage Credit Certificate?
Only borrowers buying a home qualify – it is not for refinances. The only exception to the rule is if you are paying off a bridge loan, which is most common with new construction loans. Any type of housing qualifies, either new or existing. However, you must purchase the home as your primary residence. The program is not available to investors or those buying a second home.
Of course, every program has its downsides. Before you apply and pay for the certificate, consider the long-term implications. The certificate is good for the life of the loan. But, think of your long-term plans. Are you going to stay in the home that long? Usually it only pays off if you stay in the home for at least 9 years. However, the longer you stay the better.
Also, pay attention to your actual tax liability. Make sure you’ll make your money’s worth out of the certificate. If you already receive several credits, including the Child Tax Credit, it may not be worth it. Check with your tax advisor before proceeding.
The Mortgage Credit Certificate can be a great way to save money on mortgage interest. If you are a first-time homebuyer, it usually has the greatest impact. As always, check with a professional to make sure it makes sense in your situation. Exploring all of your options can help you make the most out of your mortgage.