Strategy 26 of 107
First-time buyers: a Mortgage Credit Certificate
What it is
Ask your state or local housing finance agency whether it issues Mortgage Credit Certificates and whether you qualify. They are usually for first-time buyers under income and price limits.
Steps
- Ask your state or local housing finance agency whether it issues Mortgage Credit Certificates and whether you qualify. They are usually for first-time buyers under income and price limits.
- Each year a percentage of your mortgage interest becomes a tax credit (Form 8396), a dollar-for-dollar cut in tax.
- Raise withholding to match, or send the larger refund to principal.
Repeat: Every tax year for the life of the loan.
Measure: Yearly credit (enter as a yearly amount, or a twelfth of it as a monthly amount).
Try it in the calculator Enter its amount in "Monthly non-income amount to principal". Add a payoff goal of 5 years to see what is still needed.
Risks
- The certificate must be issued at purchase; it cannot be added later.
- Selling within nine years can trigger a federal recapture tax.
Who it fits
Newlyweds, Single, College students, No high school diploma, No college degree, Average household
Needs
First-time home buyer; Buying a home now or soon
How predictable
Most predictable: once in place, the payoff date is arithmetic
A worked example (hypothetical, not guaranteed)
Picture a hypothetical household (newlyweds). They owe $300,000 at 6.5% with 30 years left. The required payment is $1,896 a month, and that payment, which comes from income, never changes in this example.
They follow the steps: ask your state or local housing finance agency whether it issues Mortgage Credit Certificates and whether you qualify. They are usually for first-time buyers under income and price limits.
Suppose it brings $600 a month on principal from this strategy, not from the paycheck. The loan would be paid off in 16 years 3 months instead of 30 years, saving about $196,219 in interest. To finish in five years, they would still need about $3,374 a month more from other strategies. That is why the five-year sequences stack several at once.
The amount above is chosen only to show the arithmetic. It is not an estimate of what this strategy will produce for anyone. Put real numbers from the fact finder into the calculator.
Sequences that use it
- First-time buyer stack: Set it up at purchase: the credit certificate and a bought-down rate must happen at closing; then yearly gifts and dropping mortgage insurance at 80%.
Sources and more information
Where to get help
Related strategies
- 27. Build or convert an accessory unit and rent it
- 29. Rent the home by the day for photo shoots, filming and small events
- 30. Rent out the driveway, garage, shed or attic for parking and storage
- 31. Put the land to work: hunting lease, timber sale, billboard or cell-site lease
- 35. Home sharing through a nonprofit matching program
- 36. Landowners: a genuine conservation easement on land you keep