Tuesday, March 9, 2010

To Buy or Not to Buy: Taking Advantage of the Homebuyer's Tax Credit

/PRNewswire/ -- Despite the extension of the 2009 homebuyer's tax credit to April 30, 2010, and low home prices, potential buyers need to carefully examine their finances before taking the plunge.

"Many people are able to benefit from this tax credit, but that does not always mean buying is a good option for them," said Lindsay Alston, a credit counsellor with CESI Debt Solutions. "You have to look closely at your income to see if the numbers work."

A key rule for homebuyers to remember is that your mortgage, including the principal, interest, taxes, association fees and insurance should never exceed 30 percent of your gross income. A debt-to-income ratio higher than 30 percent indicates that at the end of the year, the amount you are spending on homeownership might exceed what you can afford - and ending up in the red will offset the benefit of owning a home.

"It is the buyer's responsibility to understand the full cost of owning a home - which includes maintenance," said Alston. "It means being responsible for replacing the hot water tank when it dies, or fixing the roof in the event of a fallen tree."

A tax advisor can help house hunters understand the benefits of the tax credit. The credit, which offers 10 percent back on a home's purchase price up to $8,000, will be added to a current tax refund or subtracted from money owed back in taxes. For example, if you already owe $500 in 2009 federal taxes and qualify for a $2,000 homebuyer's credit, you will only see an additional $1,500.

"The tax credit is a great incentive for people who are financially in good shape and planning to buy a new home anyway," said Alston. "But if you don't think you can make the numbers work without it, you should probably wait and continue to save, even if it means missing out on the tax credit."

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