How Can I Reduce My Income Tax With My Mortgage?
There is a lot that factors into the price of housing in an area. Learning basic economics, you learn that supply and demand play a big part in the cost of items. Right now, we are seeing a shortage of GPUs for computer builders. There is a large demand for GPUs and there are very few being produced. This is causing prices to go from being reasonable to being upwards of $1000. The same goes for housing. We are seeing a huge demand in housing, with fewer on the market. This is allowing sellers to ask for higher prices and drives more housing prices to go up in the area - comparables. The economy also plays a major factor in housing prices. When the economy is doing well and unemployment is low, we generally see a rise in housing prices. A stronger economy means that people feel more comfortable with their jobs and ability to pay off debt.
How Do California Prices Compare to the Rest of the Country?
In California, we have some pretty high housing prices. I travelled out of state for one of the first times since lockdown. I am so used to housing prices in the $700,000 range that I forgot the rest of the country doesn’t have insane housing prices. Talking with people in other states, they’re seeing housing prices in the $250,000 range - which is expensive for them. There’s of course a lower demand and the economy is different in the area, which will keep prices lower. Living in a state where prices are outrageously expensive compared to the rest of the country, there are naturally programs to help buyers obtain the dream of owning a home.
There are plenty of grants, aid, mortgage options with a low down payment, and many other resources available. One of these resources is the Mortgage Credit Certificate Tax Program, or MCC for short.
What is the Mortgage Credit Certificate Tax Program?
The MCC Tax Credit is a deferral credit to help borrowers reduce the potential income tax liability. In other words, it helps borrowers have a better income to be used towards the monthly mortgage payment. The program helps first-time homebuyers convert a percentage of their annual mortgage interest into a direct dollar for dollar tax credit on their income tax returns. The program was designed to help families that have a low to moderate income better manage their mortgage, and finances. This in turn, allows the cost of owning a home to seem more affordable and attainable.
The annual mortgage interest is multiplied by 20%, which equals the amount of tax credit that will become available to the borrower for tax income purposes. For example, if we spend $10,000 on interest we will get a credit of $2,000 towards our income taxes.
How Do I Apply?
The borrower can apply for the MCC Tax Credit through their MCC Tax Credit eligible lender. The lender will help determine if the borrower is eligible for the tax credit. When the loan is approved, the underwriter will certify the borrower through the CalHFA eHousingPlus system.
How Does the Program Work?
The MCC program takes a portion of the interest paid on the loan and turns it into a tax credit. The remaining mortgage interest that is paid is used as a tax deduction. The tax deduction is subtracted from the adjusted gross income before the federal income taxes are calculated. The tax credit is then subtracted from the total federal income tax liability, meaning a greater dollar for dollar savings. However, the amount of tax credit cannot exceed the total tax liability a borrower has for the specified year.
The program allows more potential home buyers to get their feet wet in the housing market. The Mortgage Credit Certificate Tax Program converts 20% of a borrower’s annual mortgage interest into a dollar for dollar tax credit. A savings of $2,000 over the course of the year is a $166 savings every month. The credit may seem minuscule, but over the life of the loan that is thousands in savings. An increase in cash flow for first time home buyers allows a bigger sense of independence and financial freedom. Moreover, it makes owning a home more affordable.