Think of Tax Credit as 15-Year Loan, And Rethink Whether You Need It

Lots of folks have been asking me whether the much-touted first-time homebuyer tax credit is worth taking.

"I'd like to see you write a follow-up on who should take advantage of this credit," wrote Liz Kiser, who lives in Oklahoma. "Being that it's a loan, it obviously isn't going to be economical for everyone."

Kiser qualifies for the tax credit, which was established recently as part of the Housing and Economic Recovery Act of 2008. The law authorizes the credit up to $7,500 for qualified first-time buyers purchasing homes on or after April 9, 2008, and before July 1, 2009. The catch is that you have to pay the money back to the Internal Revenue Service over 15 years.

Kiser is an outreach coordinator for Oklahoma Money Matters, a financial literacy initiative of the Oklahoma Guaranteed Student Loan Program. The program provides resources to help people manage their personal finances, understand consumer credit issues and navigate the financial aid process.

Because Kiser is in the financial literacy business, she knows that just because something sounds good doesn't mean it's a wise move.

Take her situation. She's single. She bought her first home in April.

"I am not in any way struggling to pay my mortgage and I don't have credit card debt," she wrote.

So should she take advantage of this loan anyway, she wanted to know.

Certainly the terms are appealing. You can pay the money back in equal yearly installments, and the government isn't charging interest.

"Sure, I need a lawn mower and I wouldn't mind the boost in my savings since my down payment wiped me out, but is this tax credit really economical if I don't really need the money for anything except immediate gratification?"

I'm very concerned about how this tax credit will be marketed.

I'm sure it will be pushed as if it's a no-brainer. Why wouldn't you take "free" money, borrowers will surely be told.