Marilyn Kennedy Melia
February 12, 2006
The government dangles that carrot as one of several incentives encouraging homeownership.
Last week’s financing column described how many local programs provide cash for down payments of first-time buyers who meet certain requirements, such as income that’s below median.
There are also some mortgages that offer tax breaks beyond the usual deductibility of mortgage interest.
Alternatively, there are mortgages offered at a relatively low fixed rates, available to eligible buyers in Illinois.
Moreover, while most of the perks are aimed at first-timers, some are open to repeat buyers who purchase in certain “target” areas, so designated because the government would like to see more investment there.
It adds up to a confusing landscape of incentives for home buyers.
But it can be worth investigating and going after the perks, says Geoff Smith of the Woodstock Institute, a Chicago non-profit that studies housing. “Any type of loan program or down-payment assistance that allows for low or moderate-income borrowers to afford a home is critical,” Smith says.
Diligent home buyers may be able to collect multiple perks, such as cash for a down payment as well as a special mortgage.
“We tell people to identify the down-payment assistance they might get and then use the TaxSmart mortgage on top of that,” says Marti Wiles, coordinating planner with the Chicago housing department. Available to certain city buyers, the TaxSmart mortgage offers yearly tax savings through a speical credit.
Illinois buyers must choose, however, which type of mortgage to go after — one offering a low rate, or one offering an extra yearly tax credit.
Eligible borrowers can obtain either one, but not both, says Bryan Zises, spokesman for the Illinois Housing Development Authority (IHDA).
A tax credit is an amount that can be subtracted from the homeowner’s income tax bill after all other deductions, like mortgage interest, have been considered.
However, the choice is available only to buyers outside Chicago because the city doesn’t offer a discount-rate mortgage. It did have such an offering, but disbanded it in the past couple of years because interest rates were low, Wiles says.
Borrowers who crunch the numbers will most likely find that the mortgage that offeris the tax credit certificate is the better option, says Steven Weydert of Bowyer, Weydert Wealth Planning Partners in Park Ridge.
Because the discount rate loan is about a half percent lower than other competitively priced mortgages, the yearly tax credit is probably worth more to most home buyers.
On a $120,000, 30-year mortgage at the discount rate offered in late January of 5.95 percent, a borrower would save about $600 in interest charges the first year, compared to a reduction in a tax bill of about $1,500 with the credit, according to Weydert’s analysis. Keep in mind that mortgage rates will fluctuate with market conditions.
The discount rate I-Loan tends to appeal to different home buyers than the I-Loan Certificate, Zises says.
The discount rate I-Loan tends to be favored by lower-income borrowers who are struggling to afford mortgage payments or who need cash for closing costs. If borrowers elect to pay one-quarter of a percent higher on the I-Loan, they receive $1,000 in closing cash.
Income and price limits for the city’s TaxSmart mortgage are at www.cityofchicago.org/housing. A one-person household can have a household income of no more than $60,320 if buying in a non-target area to qualify. For the state programs, a one- or two-person household buying in a non-target area can’t exceed $69,700. More information is at www.ihda.org.