The new housing credit sounds good, but it's really a loan, so make sure you need it

By Michelle Singletary
August 20, 2008
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Lots of folks have been asking if the much-touted first-time homebuyer tax credit is worth taking.

"I'd like to see you write a follow-up on who should take advantage of this credit," wrote Liz Kiser, of Oklahoma. "Being that it's a loan, it obviously isn't going to be economical for everyone."

Kiser qualifies for the credit, established as part of the Housing and Economic Recovery Act of 2008. It authorizes a credit of up to $7,500 for first-time buyers purchasing homes on or after April 9, 2008, and before July 1, 2009. The catch: You have to pay the money back to the Internal Revenue Service over 15 years.

Kiser knows that just because something sounds good doesn't mean it's a wise move.

Take her situation. She's single. She bought her first home in April. "I am not in any way struggling to pay my mortgage and I don't have credit card debt," she wrote.

So should she take advantage of this loan anyway?

The terms are appealing. You can pay the money back in equal yearly installments, and the government isn't charging interest.

"Sure, I need a lawn mower, and I wouldn't mind the boost in my savings . . . but is this tax credit really economical if I don't really need the money for anything except immediate gratification?"

I'm very concerned about how this so-called tax credit will be marketed - as a no-brainer. Why wouldn't you take "free" money, borrowers will surely be told.

"Don't miss what could be the opportunity of a lifetime to get into the home of your dreams," the National Association of Home Builders trumpets on its website.

Sandy Dunn, president of the association, said that as millions of buyers enter the market and claim the credit, it will "stimulate buying, up the housing ladder."

Um, excuse me, isn't that what helped get us into this housing crisis - people buying homes they weren't ready for?

But let's get back to Kiser. I asked her a series of questions.

"If someone knocked on your door and said, 'Hey, I have $7,500 to lend you at zero percent interest, and you can pay me back over 15 years,' would you take the money?"

"Probably not, unless I had something specifically I needed the money for," Kiser said.

OK, so what if you need furniture? Would you take out a 15-year loan, even at zero percent?

"No, I wouldn't," she said. "I would save up the money."

Kiser said she thought about taking the credit and using it to pay down her current mortgage.

Would you walk into a bank and take out a 15-year loan to pay down an affordable mortgage?

"No, definitely not," Kiser said.

Kiser wondered how she might feel if she sold her home.

Under the law, if you sell the house before you pay off the loan, the entire amount becomes due. You pay back the loan from any profits of the sale. Kiser didn't like the idea that she'd be saddled with having to hand over a lump sum of equity under that condition.

Kiser won't take the credit.

Michelle Singletary is a columnist for The Washington Post.

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