The Color of Money: Think carefully about homeowner tax credit

Lots of folks have been asking me if the much-touted first-time homebuyer tax credit is worth taking.

“I’d like to see you write a follow-up on who should take advantage of this credit,” wrote Liz Kiser, who lives in Oklahoma. “Being that it’s a loan, it obviously isn’t going to be economical for everyone.”

Kiser qualifies for the tax credit, which was established recently as part of the Housing and Economic Recovery Act of 2008.

The law authorizes the credit up to $7,500 for qualified first-time buyers purchasing homes on or after April 9, 2008, and before July 1, 2009. The catch is that you have to pay the money back to the Internal Revenue Service over 15 years.

Kiser is an outreach coordinator for Oklahoma Money Matters, a financial literacy initiative of the Oklahoma Guaranteed Student Loan Program. The program provides resources to help people manage their personal finances, understand consumer credit issues and navigate the financial aid process.

Because Kiser is in the financial literacy business, she knows that just because something sounds good doesn’t mean it’s a wise move.

Take her situation. She’s single. She bought her first home in April.

“I am not in any way struggling to pay my mortgage and I don’t have credit card debt,” she wrote.

So should she take advantage of this loan anyway, she wanted to know.

Certainly the terms are appealing. You can pay the money back in equal yearly installments and the government isn’t charging interest.

“Sure, I need a lawn mower and I wouldn’t mind the boost in my savings since my down payment wiped me out, but is this tax credit really economical if I don’t really need the money for anything except immediate gratification?”

I’m very concerned about how this so-called tax credit will be marketed.

I’m sure it will be pushed as if it’s a no-brainer. Why wouldn’t you take “free” money, borrowers will surely be told.

“Don’t miss what could be the opportunity of a lifetime to get into the home of your dreams,” the National Association of Home Builders trumpets on its Web site.

Of course builders love this loan.

“The nation’s homebuilders are confident that a new temporary $7,500 tax credit for first-time homebuyers ... will get buyers back into the marketplace and help end the current cyclical downturn in the housing industry,” the association said in a news release.

That’s how an interest-free loan is often sold—as if there is no downside to being in this type of debt. But this loan has to be repaid to the IRS.

Fail to pay as required and you’ll get hit with all the same penalties and fees associated with any outstanding tax debt, according to IRS spokesman Eric Smith.

Sandy Dunn, president of the builders’ association, said that as millions of first-time buyers enter the market and claim the credit, it will “stimulate buying up the housing ladder.”

Um, excuse me, isn’t that what helped get us into this housing crisis -- people buying homes they weren’t ready for?

Many borrowers won’t focus on the fact that this credit is really a long-term loan. And I doubt many builders will play up that fact either.

But let’s get back to Kiser.

She still was uncertain about taking this credit. So I asked her a series of questions.

“If someone knocked on your door and said, ‘Hey, I have $7,500 to lend you at zero percent interest, and you can pay me back over 15 years,’ would you take the money?”

“Probably not, unless I had something specifically I needed the money for,” Kiser said.

OK, so what if you do need a lawn mower or furniture?

Would you take out a 15-year loan—even at zero percent—to pay for those items?

“No, I wouldn’t,” she said. “I would save up the money.”

Then Kiser said she thought about taking the credit and using it to pay down her current mortgage.

Think about it this way. Would you walk into a bank and take out a 15-year loan to pay down an affordable mortgage?

“No, definitely not,” Kiser said.

Kiser then wondered how she might feel if she sold her home in the next several years.

Under the provisions of the law, if you sell the house before you pay off the loan, the entire amount becomes due. You pay back the loan from any profits of the sale.

Upon reflection, Kiser didn’t like the idea that she would be saddled with having to hand over a lump sum of equity under that condition.

“I never thought of the credit this way,” Kiser said after my questions. “When you point out that this is debt, no matter how you slice it, and that you are responsible for that debt, I see it another way.”

Kiser isn’t going to take the credit. She doesn’t need it.

Listen to Michelle Singletary discuss personal finance every Tuesday on NPR’s ``Day to Day.’’ To hear her reports online go to www.npr.org. Readers can write to her c/o The Washington Post, 1150 15th St., N.W., Washington, D.C. 20071. Her e-mail address is singletarym@washpost.com. Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer’s name, unless a specific request to do otherwise is indicated. Copyright 2008, Washington Post Writers Group