As a new homeowner, you may be eligible to buy a Mortgage Credit Certificate. This certificate enables you to a tax benefit when you file your federal income taxes. You buy the certificate at your closing, but you don’t use it until it’s time to file your taxes.
Typically, in order to be eligible, you must either be a first-time homebuyer or you have not owned a home within the last three years. You must also have limited income. The IRS determines the maximum income for each county on a yearly basis. Unfortunately, the limits apply to both single and married couples, so it’s often difficult for a married couple with two working spouses to qualify.
How the Mortgage Certificate Works
If you buy a certificate, it will cost you around $650. Your lender may also charge a processing fee, so you’ll want to inquire about that with the lender. You’ll have to apply for the program and get approved based on your income, which as we stated before, could differ by county. If you qualify, you’ll likely get a 20% mortgage interest credit, but some counties offer more or less.
If you buy the certificate, you may be eligible to make a portion of the interest you paid on your mortgage over the last year a credit rather than a deduction. A tax credit means you earn a dollar for dollar credit on your income. For example, if your credit is $2,000, you could knock $2,000 off your taxable income. This directly decreases the amount of taxes you would owe. The remaining interest that didn’t become a credit can still be deducted as you would on a normal tax return.
Who Benefits From the Mortgage Credit Certificate?
Even though the MCC sounds like a great deal, it’s not for everyone. Because you have to pay for it, you should know who benefits the most from it.
- Borrowers with a large loan that will pay a lot of interest
- Borrowers that will owe at least as much as the certificate is good for in taxes
- Borrowers in a high tax bracket
If you don’t pay a lot of taxes, aren’t in a high tax bracket, or you won’t keep your loan for very long, it doesn’t make sense to spend the money on the MCC.
As with anything that has to do with your taxes, you should consult with your tax professional. He can tell you if buying the Mortgage Credit Certificate makes sense. If you won’t at least break even on the deal, it’s not worth the money or the time it takes to go through the process. If you will save money, though, it can be a great way to use homeownership to your benefit.