SANTA CRUZ (September 7, 2008) - It is prudent to pay attention whenever the government offers to give you money. That was precisely the intent of the new bill that was signed by the President on July 30. The Housing and Economic Recovery Act of 2008 was designed to breathe new life into the country’s distressed real estate and mortgage markets.

One of the features of this bill is that it provides qualified first time homebuyers who buy a home between April 9, 2008 and July 1, 2009 a tax credit of $7500. A first time homebuyer is anyone who has not owned a principal residence in the past three years. Single taxpayers who make less than $75,000 or married couples who make less than $150,000 qualify for the full tax credit. This tax credit is essentially an interest-free loan that must be paid off over 15 years. Anyone interested?

A tax credit is granted by the government and reduces the amount of federal income taxes owed. For example, if you owed $7500 or more in federal income taxes at the end of the year, this tax credit would wipe out $7500 in taxes due. If your employer had deducted $7500 or more over the course of the year, the taxpayer would get a refund check of $7500 from the IRS.

Unfortunately, this $7500 does have to be paid back but it does work like a loan that accrues no interest over its 15 year term. In other words, $500 per year in payments will have to be made until the $7500 is paid back or the home is sold, whichever occurs first. If there is not sufficient profit from the sale of the home, the debt is forgiven. Payments do not start until two years after the date of purchase.

This portion of the bill is designed to encourage prospective homebuyers to make their move now (April, 2008 - July, 2009) rather than later. Combine this incentive with sellers who are anxious to sell and interest rates at near historic lows and you have a winning situation for homebuyers today.

The bill provides other benefits to homeowners as well. It is expected to help some 400,000 families refinance out of a potential foreclosure situation, enhance mortgage disclosures and it provides much needed financial backing to Fannie Mae and Freddie Mac, the nation’s largest investors in home loans. Additionally, it raises the conforming loan maximums to $625,500 in high priced areas like Santa Cruz County.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.