Ever since the seller paid down payment assistance programs went away, federal grant programs have become extremely popular. One program that folks are really not taking advantage of is the MCC tax credit. A lot of lenders don’t offer it because it doesn’t make them any money and it’s just extra work for the loan officer without any compensation. This is a pretty awesome program that I think everyone should be getting in my opinion. If your purchasing a home, ask your lender to add an MCC to your loan.
What is it?
The MCC is a yearly tax credit that you can use at the end of the year when you do your taxes. Basically, the homeowner can use a portion of their interest that has accrued during the year and use it as a tax credit. This is the same tax credit that somebody would get if they had a child or other government tax credits that people receive.
The amount of the tax credit will typically vary depending on the home loan amount but on average you can get back %20 of the interest that you paid during the year. So for example if you paid $6,000 in interest during the year and you qualified for a 20% tax credit, that means you’ll get a $1,500 tax credit at the end of the year. You can use this money to offset any taxes owed. Most MCC programs will have a $2,000 yearly cap. Don’t confuse this with just a standard tax write-off. This is an actual credit that can be used to offset any tax liabilities. You can use the MCC for the life of the loan but keep in mind that as the years go by, you pay less and less interest and in result your tax credit will decrease as well. Not the worst thing in the world considering that means your getting closer to paying off your house though.
If we really break it down, by getting back a portion of the interest that you pay during the year, we can argue that it’s beneficial to use a lender who is offering an MCC even if they have a slightly higher interest rate than the bank not offering it. At the end of the year, the MCC really acts as a reduction of interest, therefore you can look at it just like a reduction of your interest rate.