Middle-income folks convinced that tax breaks are only for the rich should check out a new program from the Chicago Department of Housing.
By trading in its unused bond authority-a pool of about $45 million-the city is able to grant qualified home buyers direct federal tax credits good for the duration of their mortgages. This means participants in the Chicago Mortgage Credit Certificate Program can chop off either 35 percent or $2,000 (whichever is lower) from their total annual tax bill to Uncle Sam.
No one-time shot, this tax credit is valid every year you make mortgage payments.
“It’s a great opportunity to help homeowners and it doesn’t cost (the city) anything,” said Marina Carrott, housing commissioner.
She estimated there are enough credits for about 500 individuals and families.
Another benefit: “The money stays in Chicago instead of going to the feds,” said Bill Morris, senior vice president at George K. Baum & Co., a Chicago investment banking company that is serving as program administrator.
Although aimed primarily at first-time home buyers, the MCC program is also open to veteran homeowners who purchase property in targeted areas of the city, designated as low-income by census information. “It’s part of our program to stimulate community revitalization,” said Carrott.
Morris noted that 30 to 45 percent of the city could qualify as one of these target areas. “You’d be surprised,” he said.
Although the MCC program was launched in November, there hasn’t been a rush of applicants. To date, only two individuals have qualified.
Carrott chalked up the slow start to winter-typically a slow season for home buying. She expects activity to pick up this spring and says the program will continue until the tax credits run out.
Another stumbling block has been the “exotic” nature of the tax break, said Morris. “It’s hard to educate the public; people think there must be a catch.”
The MCC program is unique in that it provides a tax credit, not a tax deduction. That means there’s an exact dollar amount subtracted from the buyer’s federal tax bill, not a break that’s related to his or her particular tax bracket.
And the buyer can still take the usual deduction for mortgage interest, minus the tax credit reduction, said Morris.
Who’s eligible? Buyers purchasing in a non-targeted area of town, must be first-time homeowners. Qualified applicants include individuals or couples earning $48,400 or less and families of three or more with total earnings of $55,660 or less. There’s also a cap on property price tags: $106,290 for an existing home, $165,510 for a newly built home.
If purchasing in a targeted area, qualified applicants include individuals or couples earning $58,080 or less, and families of three or more with total earnings of $67,760 or less. Up to $129,910 can be spent for an existing home or up to $202,290 for a new home.
Loans can be obtained from any lending institution.
At closing, home buyers will receive a certificate entitling them to the direct federal tax credit.
There is a fee for the certificate equivalent to 1.75 percent of the amount of the loan; that money goes to pay the program’s legal and administrative costs. But, some lenders will agree to roll the cost of the certificate fee into the mortgage loan, officials said.
If homeowners are concerned about the heavier cash burden the fee certificate will add at closing, Morris suggested they borrow at a slightly higher interest rate and pay fewer mortgage discount points (fees charged by lenders) upfront.
For example: A couple earning $40,000 a year takes out a loan of $80,000 at 7.53 percent interest with 1.5 points. Upfront fees are $1,200 for the points (each one equal to 1 percent of the loan amount) and $1,400 for the MCC certificate. Net savings through reduced taxes over the 30-year period would be $41,004.42.
If the same couple takes out a 30-year loan with a 7.85 percent interest rate and 0.5 points, they reduce upfront fees by $800 (paying $400 for the points and $1,400 for the MCC certificate). And their net savings would be $36,287.12.
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For more information about the Chicago Mortgage Credit Certificate Program, call the Chicago Department of Housing at 747-9000 or George K. Baum & Co. at 645-9497.
