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Stimulus Plan Explained

Tax Credit for Homebuyers
First-time homebuyers who purchase homes from the start of the year until the end of November 2009 may be eligible for the lower of an $8,000 or 10% of the value of the home tax credit. Remember a tax credit is very different than a tax deduction - a tax credit is equivalent to money in your hand, as opposed to a tax deduction which only reduces your taxable income.

The tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000. Buyers will have to repay the credit if they sell their homes within three years.

Tax Credit Versus Tax Deduction

It's important to remember that the $8,000 tax credit is just that... a tax credit. The benefit of a tax credit is that it's a dollar-for-dollar tax reduction, rather than a reduction in a tax liability that would only save you $1,000 to $1,500 when all was said and done. So, if a homebuyer were to owe $8,000 in income taxes and would qualify for the $8,000 tax credit, they would owe nothing.

Better still, the tax credit is refundable, which means the homebuyer can receive a check for the credit if he or she has little income tax liability. For example, if a homebuyer is liable for $4,000 in income tax, he can offset that $4,000 with half of the tax credit... and still receive a check for the remaining $4,000!

Phaseout Examples

According to the plan, the tax credit starts phasing out for couples with incomes above $150,000 and single filers with incomes above $75,000.

To break down what this phaseout means to homebuyers who are over those amounts, the National Association of Homebuilders (NAHB) offers the following examples:

Example 1: Assume that a married couple has a modified adjusted gross income of $160,000. The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time homebuyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000.

Example 2: Assume that an individual homebuyer has a modified adjusted gross income of $88,000. The buyer's income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.

Remember, these are general examples. You should always consult your tax advisor for information relating to your specific circumstances.

Homes that Qualify

The tax credit is applicable to any home that will be used as a principle residence. Based on that guideline, qualifying homes include single-family detached homes, as well as attached homes such as townhouses and condominiums. In addition, manufactured or homes and houseboats used for principle residence also qualify.

Higher Loan Amounts

More good news - there is an extension on the additional tier of conforming loan amounts which had been first established in 2008.  This tier of home loans are those greater than $417,000, and with a maximum that depends on the area, but is not greater than $729,750.  These loans will again be eligible for rates that are slightly higher than conforming loan rates, but less expensive than the standard "jumbo" loan rates.


Mortgage Rates Start To Increase



Mortgage interest rates have begun to come off the all time lows from early January and seem to have settled in the low 5% range on 30 year fixed mortgages with no points.  One of the reasons that rates have begun to increase is all of the planned stimulus packages and spending that newly elected President Obama has on the table.   The way these packages will be financed is through increased government borrowing in the form of increased supply of treasury notes.   This expectation of increased supply in the bond market has lead to higher yields in all bond markets and caused mortgage backed securities (MBS) to follow with higher yields as well.   Along with increased supply pulling the price of bonds down and thus increasing the yield; there is fear among investors that inflation will eventually pick up if the stimulus packages spark an economic recovery.  

The Fed is going forward with their program of purchasing MBS on the open market.  They have consistently been buying 3 to 4 billion of agency MBS each day.   If it were not for this constant demand provided by the Fed, mortgage rates would be much higher than they are today. 

On the bright side, as lenders get caught up on loans in their pipeline over the next month they should get more aggressive in the rates they offer on their daily rate sheets in an effort to keep the new loans coming in.  This tightening of the spread between lenders rate sheets and MBS pricing could lead to lower rates again sometime in the next month.  

While 30 year rates in the high 4% range were nice while they lasted, rates in the low 5% range are nothing to complain about either, especially with the home purchase season fast approaching. 

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