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Question:


I’m a recent first-time homebuyer. What is a Mortgage Credit Certificate?
-Melissa


Answer:


Certain state and municipal governments, eager to support their real estate markets and make homeownership more accessible to residents who are just starting out on the property ladder, grant these certificates, which allow homeowners to reduce their federal income tax liability by a portion of the amount they pay in mortgage interest.
 
Say your monthly mortgage payment is $1,500. In the early years of a mortgage, when the outstanding loan value is highest, interest accounts for nearly all of that total, so let’s call it $1,300. A 20 percent mortgage credit cuts your tax bill by $260 a month or $3,120 a year. Keep in mind that this is not just a deduction, in which your tax bill is reduced by the percentage of this amount that corresponds to your marginal tax rate; it’s a straight, dollar-for-dollar reduction of your federal tax liability.
 
Some caveats: Mortgage Credit Certificates are generally offered only for homes used as principal residences, and you may have to give back a portion of the credit if you sell the home within nine years. The break is usually available only to first-time buyers or others who haven’t owned a home in several years, and it’s seldom available on very up-market properties. The IRS limits the credit to 20 percent of interest paid, and the Schedule A itemized deduction for mortgage interest can be used only for the portion that does not qualify for the credit – 80 percent in the example above.
-Conrad de Aenlle



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