Tax Credit versus Home Mortgage Loan Subsidies- By: John Cutts

Description : The $15,000 worth of tax credit that will reduce government obligations by 10 percent of the price of a new home or a foreclosed houses bought this 2009 is now overshadowing the 4 percent subsidized home refinancing.

Why is tax credit better than interest-rate subsidy? The answer is less possible expenses.

The one year, and second year expandable, tax reduction may only cost $35-50 billion while the unpredictable cost of home mortgage refinancing interest rates may be far more expensive.

Possible cost of interest rate subsidies is reflected by the gap between market rate and the subsidized rate. The government will have to fund trillions for home mortgage refinancing, increasing interest rates and cost more national debts. Since current mortgage rates are 135 points higher then the subsidized rate, and there is an estimated $10 trillion worth of home mortgage refinancing, annual subsidy may reach $135 billion.

Then, unlike tax credit that is a one-time-big-time $35 to $50 billion expense only, subsidized expenditure will continue as long as mortgages exist.

Furthermore, tax credit does not encourage more home mortgage refinancing.

Plus, loan subsidies give more profit to the rich Americans who can finance mansions while tax credits can help anyone buying a home worth less than $150,000 only.

So what can a $15,000 tax credit do? The 1975 homebuyer’s credit, the inspiration of the current tax credit proposal, can point out some benefits.

The 1975 tax credit was also applicable to new homes only. From its effect on February to May 1975, the adjusted annual rate for new home sales surged by 150,000 units. With this historical evidence, home sales can have an upturn with tax credit.

The tax credit of 1975 was designed to get the lowest possible home price for the buyer and did little effect on real housing prices, while the new $15,000 tax credit can temporarily increase home prices by $7,500. This may have not that much effect on the massive attack of foreclosure and mortgaged-supported securities but increasing home prices artificially would only cause less home affordability and overbuilding.

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Author Resource : John Cutts has been educated in the finer points of the foreclosure market over 5 years.