Homebuyers: Let Government Pay 10 Percent of Your New Mortgage!

New mortgage borrowers can save as much as 10 percent on their home purchase, just for buying their first home in 2009.

Over the past few weeks, the homebuyer tax credit may have generated more rumors than Brad Pitt and Angelina Jolie. There's a happy ending here, however: lawmakers have finally settled on the terms of the program, and the new tax credit may be the reason consumers get off the fence to buy that first home.

Tax credit heaven

The American Recovery and Reinvestment Act of 2009 contains the final version of a new homebuyer tax credit that divided lawmakers along party lines. Here are some of the program's key points:

• The tax credit is available only if the house that you purchase in 2009 is a primary residence and your first home.

• The amount of the tax credit is 10 percent of the purchase price, not to exceed $8,000, assuming that you're either a single taxpayer or married and filing jointly. Married taxpayers who file separately can take a maximum credit of $4,000.

• This tax credit doesn't need to be repaid and is refundable-you'll get a check back from the government if the credit exceeds your tax liability.

• Income limits apply. The tax credit begins to phase out when your modified adjusted gross income (MAGI) reaches $150,000, assuming that you're married and filing jointly. The phase out begins at a MAGI of $75,000 for single filers.

Smaller mortgage, lower interest

The short of the tax credit story is this: if you purchase your first home and it costs $80,000 or less, the government will essentially fund 10 percent of your investment. If the property costs more than $80,000, you still enjoy a savings of $8,000-but it will be somewhat less than 10 percent of your purchase price. Depending on the strength of your current finances, you can use the $8,000 tax gift to justify a larger down payment and lower mortgage amount. Or, you could wait until you've realized your tax savings, and then make a large principal payment on your mortgage next year.

The first option will save you from a year's worth of mortgage interest on that $8,000-but it requires you to come up with the down payment money before you actually benefit from the tax credit. And, depending on how you manage your taxes, the $8,000 may not come back to you in actual cash; you may simply end up with a smaller tax bill at the end of the year.

The second option requires careful planning, as well.  Whether you get a tax refund or enjoy a lower bill next year, you'll still be $8,000 ahead. Send that eight grand to your mortgage lender next year, and you'll save a bundle on your mortgage interest expense over time.  

Brad and Angie will long be the victims of tabloid rumors. But at least we can finally put this tax credit question to rest.