Would you like to drop your mortgage rate from 5.5% to 4%? Crazy question, right? In Colorado, qualified homebuyers can apply for the Colorado Housing and Finance Authority (CHFA) Mortgage Credit Certificate (MCC) to do just that. That was a mouthful!
Everyone knows that their monthly payments for the first several years of their home mortgage are made up largely of interest. For this reason, large fluctuations in your mortgage interest rate can really impact your bottom line. With the recent increases in mortgage interest rates, we thought we should inform new homebuyers of the CHFA MCC program which can make the interest you pay more rewarding.
For loans that close prior to June 25, 2010, buyers who meet the following criteria may apply for the CHFA MCC.
- Household income and home purchase price limits
- FICO score of 580 or higher
- Use the new home as their primary residence
- Have not owned a home as primary residence in the past three years (first time homebuyers) OR are current homeowners looking to refinance certain qualified subprime mortgages, OR who are eligible veterans may apply.
What does it all mean? The CHFA MCC program allows qualified homebuyers to claim a dollar-for-dollar reduction of income tax liability equal to 20% of their paid mortgage interest on their first mortgage….for as long as they own (and live in) their home! In addition, the remaining 80% of the paid mortgage interest continues to qualify as an itemized tax deduction.
Let’s look at an example (simplified for illustration purposes – for a full example check out CHFA’s MCC example):
$150,000 Purchase Price @ 5.5% Interest Rate
| WITH MCC | ||
|---|---|---|
| Interest for year: | $8,250 | |
| X 20% (MCC Refund) | = $1,650 | |
| X 80% (remaining to deduct as normal) | $6,600 | |
| Property Tax Estimate | $1,500 | |
| Total Deductions | $8,100 | |
| X 15% (Estimated Tax Bracket) | = $1,215 | |
| Total Sample Refund (with MCC) | = $2,865 | |
| WITHOUT MCC | ||
|---|---|---|
| Interest for year: | $8,250 | |
| Property Tax Estimate | $1,500 | |
| Total Deductions | $9,550 | |
| X 15% (Estimated Tax Bracket) | = $1,432 | |
| Total Sample Refund (without MCC) | = $1,432 | |
Homebuyers who purchased a new home with a loan amount of $150,000 at an interest rate of 5.5% will get double the tax refund related to the home mortgage only. The $1,650/yr in additional tax deduction (from MCC) equates to a monthly savings of $137.50 which FEELS like a LOWER INTEREST RATE. Calculating it out the effective interest rate you would be paying in this scenario would drop from 5.5% to 4%!!
Not all lenders participate in the program, so to be sure you select one who does, visit CHFA’s website. This is a huge advantage for qualified buyers! There is another added benefit we are able to extend to our borrowers. Very few lenders, yes we are one of the few, allow borrowers to use the monthly tax savings to qualify for a larger loan amount, which means they have more purchasing power! In this particular scenario, the borrower can now qualify for a $174,000 loan instead of the $150,000 loan. The borrower can adjust their W-4 withholdings to receive the extra money during the year.
There has to be a catch, right? Well, there is, although the likelihood of a penalty is fairly small. Borrowers who participate in the MCC program are subject to recapture tax. We stated the likelihood of a penalty is small (only 1 customer in our 13 years, and over 500 customers, of doing these types of loans has ever had to pay the penalty) and here’s why. Three things must occur simultaneously to trigger recapture tax.
- The buyer has to sell their home in the first 9 years of ownership
- The income of the buyer has to have increased significantly – over the maximum limits for the year they sell and
- The buyer has to make a profit on the sale of the home.
There is a one time fee to participate in the CHFA MCC program, but your refund in the first year will more than make up for the fee in the first year.
If you are looking to buy in the state of Colorado and would like to use this program, contact us and we will help you!
Lending A Hand
Marla Wynn
The Wynn Team
Tags: Assistance, Qualifying, Rates, tax credit
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