There's a new tax credit for first-time homebuyers in New York state that allows them to deduct 20 percent of their mortgage interest payments from their federal income taxes. Better yet, it allows them to do it for the life of the loan.

There's a new tax credit for first-time homebuyers in New York state that allows them to deduct 20 percent of their mortgage interest payments from their federal income taxes. Better yet, it allows them to do it for the life of the loan.

The new program, called the New York State Mortgage Credit Certificate, will enable homebuyers to save an average of $1,500 a year on their federal taxes, according to an announcement from the office of Gov. David Patterson. The program offers a straight federal income tax credit - the deduction comes right off the homeowner's federal income tax liability.

Additional benefit on top of $8,000 federal tax credit

The program is touted as a way to extend the benefits of the federal government's one-time $8,000 tax credit for first-time homebuyers, that expires at the end of November. However, homebuyers who act quickly may be able to take advantage of both programs, particularly if the federal program is extended, as many expect. And the New York state program offers a potentially bigger payoff, since the deduction is good for the life of the loan.

As an example, the governor's office cited a homeowner with a $150,000 loan at 5.5 percent. Such a homeowner would pay about $8,200 in interest in the first year of the mortgage, of which 20 percent would equal a $1,640 reduction in federal income taxes, or about $137 per month. Although the deduction would gradually shrink as the mortgage is paid down, such a homeowner would still average $1,520 in tax savings per year over the first 10 years of the mortgage.

The remaining 80 percent of mortgage interest paid can still be taken as a federal tax deduction. However, the amount of the credit cannot exceed one's total federal tax obligation.

Limited to low- and middle income buyers

The program does come with a number of limitations. The upper-income limits are quite modest - as low as $68,000 for a childless, two-income couple living outstate, although that rises to as high as $107,500 for a three-person or larger household in New York City and other high-cost areas.

Purchase prices are limited to about $259,000 for single-family homes in most of the state, rising to $638,000 in New York City and Long Island, with greater limits allowed for multiunit dwellings where the borrower uses one unit as their primary residence.

Ironically, in many cases the program allows higher limits on both income and housing prices for homes purchased in economically distressed "targeted areas" where prevailing home prices and incomes are likely to be lower than equivalent nondistressed neighbordhoods.

In addition, the program is limited to 30-year fixed-rate mortgages only, and the credit expires if the loan is refinanced. In another twist, the mortgages provided through the State of New York Mortgage Agency (SONYMA), which operates the program, are not eligible; however, most other mortgages are, including those backed by Fannie Mae, Freddie Mac, the FHA and VA.

Current buyers can still qualify

The program, which will be offered through participating lenders, is expected to be available in early September. Borrowers who have already obtained a mortgage commitment may still apply for the mortgage credit if they have not yet closed on the home purchase. The state predicts that up to 700 homebuyers will take advantage of the program in the final months of the year.

The state is able to offer the program through a provision in federal law that allows the state to convert part of its private activity bonding authority into tax credits. For every $4 that the state reduces its bonding authority, it can offer $1 in mortgage tax credits. The state is planning to reduce its bonding authority by $80 million to produce $30 million in credits.

For more information, see the New York State Mortgage Credit Certificate Program on SONYMA web site, "NYhomes."

Published on August 11, 2009