Tax Credit Use

Tax Credit Use

There are some people who would like to purchase a home today. Many of these people can afford to buy, but they are waiting. They are concerned that in this economy that they could lose their job and then be left with a mortgage which they could not afford to pay.

They recognize that prices are very low and that interest rates are also very low, but they are still concerned about maintaining employment. They do not want to end up in foreclosure or out on the street.

While many economists are indicating that the recession has ended, they also are suggesting that the total number of job losses may not end until mid 2010. This economic forecast gives credence to the trepidation that many potential homebuyers are experiencing.

Can the tax credit help them?

Depending upon the price of the home that they purchase, the tax credit of $8,000 could be equal to anywhere from two to eight month's payments, assuming that they purchase a home in the average price range of today's homes.

Generally, it is a good idea to have savings equal to 3 to 6 months of one's expenses readily available in case of a temporary setback, such as a job loss.

If one can be wise in the use of this tax credit, then they can put it aside for the potential job loss. With the economy picking up, it is likely that any unemployment would be for a shorter period of time than has been seen over the last few years. Indeed, this $8,000 could be sufficient to cover a 3 to 6 month period.

But is it a good time to buy?

As already stated, home prices and interest rates are very low. What will happen with home prices and interest rates in the short term?

With more foreclosures and short sales on the horizon, it is possible that home values could still be driven lower. However, there are other conditions which may keep the prices stable. One, the economy is pulling out of its recession meaning among other things that homeowners will be more likely to be able to afford their mortgage payments and avoid foreclosure; two, the people who have purchased over the last 2 to 3 years are in a much stronger position because of the tighter lending requirements; and three, the total number of homeowners who are not in mortgage trouble is close to 96% of all homeowners, which is a group which will strive to keep home values up.

With an increased money supply, it is likely that interest rates will start to go higher. Even if home values drop, mortgage payments will be inversely impacted by these higher rates. So waiting for prices to drop further will be of no value.

Even if prices drop by another 5%, notwithstanding the likely upward movement of interest rates, it still will be financially sound to purchase, because of the tax deduction benefits that can be received from itemizing the interest and property tax portions of a mortgage payment. These will easily offset this potential further depreciation of property values.

When all things are considered in today's real estate market, including the wise use of the available tax credit, this may be the best time to purchase a home in the last decade.

The wrong use

Of course, one can buy now and make an unwise decision for the use of the tax credit and end up going to foreclosure if they find themselves unemployed.

For instance, unless you are otherwise financially strong, it is not a good idea to use the tax credit for a trip to Disney World.

Look at the tax credit as a way of safely purchasing a home at a time when the economy is moving towards recovery and when the homebuying conditions are as good as they may ever be in your lifetime.