The Housing and Economic Recovery Act: To Take the First Time Home Buyer's Tax Credit, or Not?

The Housing and Economic Recovery Act: To Take the First Time Home Buyer’s Tax Credit, or Not?

Posted by Lynnae on August 11, 2008

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I hate the thought of owing money to the IRS.

Last Monday I gave you a rundown of The Housing and Economic Recovery Act of 2008. Part of this new legislation is a zero interest loan, disguised as a tax credit, for first time home buyers.

Since my husband and I are purchasing our first home, and we will close between April 9, 2008 and July 1, 2009, we will qualify for the credit. I have mixed feelings about it though. There are definitely some benefits to the credit, but on the other hand…it’s debt.

The First Time Home Buyer’s Credit is a Loan

I don’t like debt. And I certainly don’t like owing the United States government money. Unlike credit card debt, money owed to the government is next to impossible to discharge with bankruptcy.

I don’t like bankruptcy at all, and I think it’s overused, but I realize that there are times when things happen…a spouse walks out, a medical disaster strikes, or something else unpredictable and financially devestating…and bankruptcy is the best option. It’s nice to know there is a safety net in an extreme emergency.

By owing the government, that safety net isn’t there. If you owe the money, you had better be sure you can pay it back, even in an emergency.

The First Time Home Buyer’s Credit is an Interest Free Loan

On the positive side, there is no interest on this loan. You borrow $7500, and you have 15 years to pay back $7500. This is an appealing option for someone with high-interest debt. It’s also appealing for someone who wants to park the money in an emergency fund, where it can gain interest.

Why I’m Considering Taking the Credit

My husband and I have a student loan with a balance of just under $7000. It’s a government loan, so it’s not forgiven if disaster strikes and we file for bankruptcy. So I’d be trading one government loan for another.

We pay interest on our student loan, and we wouldn’t have to pay interest on the tax credit. In the long run, we’d be paying less if we took the tax credit.

For the past year, despite my weak moments, my husband and I have been very disciplined about not taking on any new debt. I’m confident that we aren’t going to rack up anymore debt once we pay off the student loans.

Because we’re trading one government loan for another government loan, because we would save money in interest payments, and because we have proven that we have changed our spending habits, I think my husband and I should take the tax credit and pay off our student loan. What do you think?

Photo by Tom Lemos.

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Comments

19 Responses to “The Housing and Economic Recovery Act: To Take the First Time Home Buyer’s Tax Credit, or Not?”

MITBeta @ Don't Feed the Alligators on August 11th, 2008 8:03 am

Sounds like a great arbitrage opportunity. I say go for it.
Julie on August 11th, 2008 8:30 am

As long as your husband doesn’t have a career that would allow for loan forgiveness (teachers and other public servants) I say go for it. I’m a teacher and have a huge amount of student loans. I finally gave in to a company that kept calling and bugging me about consolidation, then found out later that a big %age of my loans would have been forgiven if I had stayed with the federal loan program. As long as you’re disciplined enough to use it for the loan and not acquire other debt, zero interest is hard to beat.
Frugal Dad on August 11th, 2008 9:34 am

As long as you use the money to pay off student loans I say go for it. The risk here is that you find other uses for the money and wind up doubling the amount you are in debt. I have no doubt you would do the right thing, but I suspect others will wind up deeper in debt than they are now–similar to what happens with consolidation loans, etc.
Marci on August 11th, 2008 9:36 am

Tough one - replacing one loan with another.
Keep doing the research, find out the small minor but extremely important details, work it out on paper, and in your minds - and then make your decision.

You know you are committed to paying off debt, and doing a remarkable job of it - so only you can figure out if 1) this is something that will work for you, 2) this is something you can live with and 3) it will NOT come back to haunt you!
on August 11th, 2008 9:55 am

Go for it! An interest free loan for that lenght of time is a good deal. Just have the discipline to not grow your debt.

Karen on August 11th, 2008 10:18 am

Sounds like the best option … There’s nothing you can do to get rid of student loan debt, either, so why not avoid paying interest? If your student loan interest rate is 4% and you took 15 years to pay it off, you’d end up paying almost $2500 in interest. With the tax credit, you’d have to option to pay it off over a longer period of time without tacking on the extra $2500. Sounds win-win to me.
Sarah on August 11th, 2008 10:28 am

I would do it in a heart beat. Any left over cash can go into helping with further renovations.
Lee on August 11th, 2008 11:08 am

It sounds good, as long as you’re disciplined enough to just use it for the loan repayment. I’d have a hard time not using it for the renovations myself.

You seem to have done the research, but be doubly sure you have peace about it. If there’s any uncertainty, the best action is none.
Boo on August 11th, 2008 11:23 am

Can’t beat 0%! I vote yes as long as there are no other hidden fees or prepayment penalties.
praktisk on August 11th, 2008 11:59 am

I wouldn’t consider taking it because I don’t fell the general public knows enough information about it. I don’t trust the motives behind the generosity.
Also, you say you’ve been very disciplined about not taking on any new debt. And that’s what this would be even if it’s interest-free.
Squawkfox on August 11th, 2008 3:48 pm

Only to pay down the student loan debt…otherwise you’re just deeper in debt…and that’s not fun.
Investing For Beginners on August 11th, 2008 4:06 pm

dont be afraid of debt. debt is necessary to advance wealth faster than through savings and low return investments like CDs.

think about it like the leverage it is. 20% down gets the ability to get 5x the ROI from the total investment.
Financial Planners at Respond on August 12th, 2008 2:50 am

Not an bad idea.

I would recommend you to go for it.
Bonnie on August 12th, 2008 11:43 am

One thing you didn’t say is how much your monthly payment on the student loan is vs the monthly payment on the interest free loan. That makes a big difference in terms of evaluating the two different options.
Lynnae on August 12th, 2008 12:28 pm

Our monthly payment on the student loan is $135 and on the credit it would be about $42. So it having a lower monthly payment would definitely help. Though I’d probably still try to pay it off early, if possible.
Brad on August 28th, 2008 1:45 pm

Paying the student loans is a BAD IDEA!

If you move the whole balance is due! Because of this your increasing your risk. I would suggest Investing the money into US bonds or FDIC back CDs.

This way if you sell the house you have the money to pay back the loan, and you have money for a new down payment.

Lock the money away so that you can’t spend it!
Chris on September 1st, 2008 5:54 pm

I have a question that nobody seems to be able to answer. If I take the tax credit, will I also be able to use the state’s first-time home buyer program to get a lower interest rate?
Brien on September 3rd, 2008 12:43 pm

If you use the mortgage backed bonds of a state funded loweer interest rate program you do not get the credit. Repeat. YOU DO NOT GET THE TAX CREDIT.