A Wise Use of the $8,000 Tax Credit

A typical first time home buyer will keep that first house for 7 years. The 30 year loan is a relatively new invention and for all the impact it has had on increasing  home ownership, it may be one of the culprits in the market free fall. The extended tax credit may be the perfect tool for changing our dependence on long-term loans.

The next generation of American home owners will probably make money the old fashioned way in real estate--they'll earn it and they'll appreciate it. Unlike real estate appreciation, for which we proved to hold  little appreciation, earned money is precious. Wise young Americans will take a lesson from their grandparents and avoid the 30 year fixed mortgage and benefit.

Consider this:

A 30 year FHA loan has an interest rate of about 5.0% today. The monthly payment over 7 years will apply about than $1700.00 to principal and almost $6,000. to interest. Yikes. Before we get too excited about the mortgage interest deduction, consider what that the $6000.00 is gone money. It's value to you is a one time thing on your tax return for one year.

On the other hand, a 15 year FHA mortgage at 4.5% interest will put $5,500.00 to principal and a still hefty interest deduction of $5100.00. Granted the monthly payment is a little higher--about $400 per  month, but the savings is significant. Sure you will have less for spending but that may be OK. Learning to be conservative after growing up in a culture of buy now, pay later takes some work.

Now, as a friend of mine told me on Saturday--"Washing machines work hard." I want to help you work smart. Here's an idea. Take the $8,000 tax credit and bank it. Only use money from the tax credit to pay toward your mortgage on the months when it is absolutely necessary to cover the $400 +/- difference in your 15 year mortgage v. a 30 year.

Tough it out and you will probably find when you sell your first house to buy your second, you'll have a comfortable downpayment made up of Earned Equity, Appreciation Equity, and Government Cash.

This is what I mean by being part of the solution. Repeating the same mistakes by using the same failed formulas is wasting the opportunity we have been given in this new economy. There are no new ideas. The same tried and true principals of the past will work today.