Free From Broke

A Goal Based Approach To Debt Management

ffb — Fri, 10 Jul 2009 12:34:24 +0000

Good debt management advice is hard to come by. Traditional financial wisdom states that certain debts, such as mortgage and student loans are good debts, while most other debts such as credit card debt, car loans, etc… are bad debts. On the other hand, many Personal Finance bloggers express the opinion that ALL debt is essentially bad, to be paid down as quickly as possible, sometimes even at the cost of establishing a sustainable savings plan for the household.

So what is the truth?

In truth, the good debt vs. bad debt determination is not written in stone and needs to be evaluated based on each individual’s unique situation. In this article, we will not offer any prescriptive ‘facts’ but will try to establish a few guidelines that the readers can employ in their own situations to make the determination for themselves. It is important to understand that there are two distinct stages of any debt. Stage 1 is the decision stage when you are trying to determine if you should take on a new debt. This is a key decision point as it will likely determine your future relationship with the debt (should you take it on) and the asset that you acquire with this debt. This is also, most frequently the time when not enough thought is devoted to the decision process, as we are more likely to be intoxicated with the possibilities with the asset we are going to acquire and are not able to be rational about the financial aspect of the acquisition.

Stage 2 of the debt is after the debt has been acquired. Here the decision process changes and the question now becomes whether it makes sense to keep carrying the debt as it is or should it be paid off as quickly as possible. It should be noted that in some cases, what we determined to be a good debt in Stage 1, may actually turn into a bad debt in stage 2, sometimes due to factors beyond our control. In stage 2, it is important to realize the the debt is yours and you can’t do anything about it except to find the best way to handle it.

In this article, we will focus on Stage 1 of the debt. The full version of this article (more detail, worksheets, coverage of all stages, etc) is part of an ebook on Debt Decisions to be published soon at the Personal Dividends website. Make sure you subscribe to the email newsletter if you want to be notified when the ebook is available.

Stage 1: Choosing to take on a new debt

When debating whether to take a new debt on, it is important to focus on two key points: What is the nature of the asset that you wish to acquire with this debt and what is the cost of the debt? A good debt is always goal-based. Goals need to positively address your personal finance or lifestyle issues. A goal on the lines of: I need to buy the latest iPhone is not what we are talking about here. You also need to have a defined project in mind and a plan to accomplish your goals for the project. Debt incurred for impulse buys are never good debts.

What is a good debt?

A good debt is a debt that allows you to acquire an appreciating asset. Essentially, the value of the appreciation or income production needs to be greater than the cost of the debt that you are taking on. Which basically means that in current dollars, the total gain from the asset over the life of the debt is greater than the total interest and costs you incur on the debt. A few examples of good debt are:

Taking a student loan to pursue a graduate degree, which will result in greater income potential for the lifetime. Here the asset you are acquiring is the new/upgraded skills and career marketability.
Buying an income producing property with additional possibility for capital appreciation.
Buying a car if it is necessary for you to perform your new job. Please note that buying a car on debt is not always bad as long as there is a good reason for it.
Buying a vacation home that you plan to use to write your next masterpiece novel.
Mortgage, when you are buying a house that is likely to appreciate at a rate greater than inflation (at least, best if the appreciation rate over the term of mortgage is greater than the interest rate on the mortgage) and it provides other quantifiable and/or intangible values by greatly improving your lifestyle.

These are all good debts because they potentially create more financial value than they destroy. Please note that as most life decisions, this is not risk free. You may never get to finish that great novel or your graduate studies due to other circumstances but if you have put a great deal of thought and planning behind these projects than a large amount of risk is mitigated.

What is a bad debt?

A bad debt is a debt that allows you to acquire something with short term value, mainly for immediate consumption. These tend to be impulse buys. A few random examples would be

Buying the latest and greatest HDTV on credit when your existing TV works as well (note: that this may be a good debt if you can justify the value: for example, if you plan to install the TV at the bar of the restaurant that you own so you can show football games and in process keep the patrons lingering and ordering more of your brew).
Using credit cards for your regular grocery shopping, if you regularly carry balance. On the other hand, if you are diligent about paying off your balance every month and use credit cards only for convenience and miles/points, then it is not a bad debt.
Buying or leasing a new car every couple of years on credit.
Mortgage, when you are buying a house at prices or location where the appreciation potential is severely limited or at a high rate of interest.

Additionally, you need to consider the cost of the debt to determine if the debt is good or bad. Your money is valuable and can be saved/invested in many different ways to get you a rate of return. The question you should ask is whether it is cheaper to go into debt or should you pay cash if possible. If you can get better returns for your cash elsewhere than the amount of interest you will save if you pay in cash, than by all means take the debt on. All this amounts to a certain level of analysis at first but once you get the gist of it, this analysis will and should become a second nature.

Arohan talks about Personal Finance, Investing and other Life Improvement topics at Personal Dividends. This article is a brief preview of an ebook on Debt Decisions that will be published at Personal Dividends site soon. If you would like to be notified when the ebook is published, please register for the email newsletter at the Personal Dividends website. Feel free to visit Personal Dividends to read more of his writings and writings of other great contributors to Personal Dividends.

photo credit: kevindooley

A Goal Based Approach To Debt Management

Credit Scores Matter More Than You Think

ffb — Wed, 08 Jul 2009 12:31:12 +0000

Credit scores are important when you want to borrow money or get a new credit card. They’re important when you want to rent an apartment or a house, since the landlord will usually run a credit and background check on you before they’ll hand over the keys. If you thought all those people checking their free FICO credit score were wasting their time, you might be surprised to hear that it affects more than loans.

If you thought the importance of your credit stopped there, unfortunately, you’re wrong. There are several places where your credit score and your credit history can have an affect, even though it has nothing to do with you borrowing money.

Opening A Savings Account

Banks are starting to use your credit when you open anything from a certificate of deposit to a savings account. The reason is because you may be able to overdraft an account and so they want to know if they should be loaning you that amount, no matter how small, for the brief period until you can get your account above $0. You probably didn’t expect them to do that, I know I didn’t.

Potential Employers

Of all the areas where your credit score shouldn’t matter, this one probably takes the cake. Employers will pull your credit as part of a routine background investigation because they feel it’s an accurate indicator of whether or not you’re trustworthy. This is especially true of employers offering jobs where a security clearances is required or when you’ll be handling cash.

Is it accurate? Maybe.

Is it fair? Probably not.

However, we must live in the reality we are in and a poor credit score or spotty history might get you rejected for a job you’re otherwise qualified for.

Insurance Companies

Insurance companies use credit scores to determine how much of a risk you are. They use it to set insurance premiums on auto and homeowners insurance, though they don’t use it to determine whether or not you get insurance. According to this Bankrate article, the Insurance Information Institute states that “drivers at the bottom of the credit heap file 40% more claims than drivers at the top of the pile.” Whether you like it or not, insurers use that information against you.

(Editor’s Note - Your credit score can help you here too. I get a discount on my auto insurance based on my credit score.)

Cell Phone Providers

This one is a little less serious than insurance and potential employers but you could be rejected for a cell phone if you have bad credit. The reason is because cell phone companies bill you at the end of the month, which means they’re effectively giving you a one month loan.

In addition to the monthly service plans, their business model depends on you being able to pay for a monthly service plan for the entire contract period. Since they often take a loss on the cell phone itself, they have to make it back on the monthly service plan. If you can’t meet that obligation, they lose money; so they use your credit score to determine if you should get a cell phone!

As you can see, your credit score is starting to be used in areas it was never intended, so it’s important that you make sure you keep up a good credit score.

This is a guest post from Jim Wang of Bargaineering. Jim writes about personal finance and other money matters at Bargaineering.com.

photo credit: mangpages

Credit Scores Matter More Than You Think

Car Allowance Rebate System - Cash For Clunkers

ffb — Wed, 01 Jul 2009 12:59:16 +0000

In late June President Obama signed into law the the Car Allowance Rebate System or as it’s also known: Cash for Clunkers. This is a program that encourages people to trade in their cars for more efficient models. It also helps to stimulate the economy (similar to the first time home buyer tax credit) at a time when car sales are lagging.

The program runs from July 1st through November 1st 2009. Cars traded in during that time could be eligible for a credit of either $3500 or $4500 depending on the car and the increase in mileage the new vehicle provides.

From the CARS.gov site:

The vehicle must be less than 25 years old - No digging up a rust-beaten car from the 70’s!
You must purchase or lease a new vehicle - This doesn’t qualify for used vehicles. Leases must be for at least 5 years.
For the most part, trade-ins must get 18 miles per gallon or less (when they were new).
Trade-in cars must have been registered and insured for at least a year prior - No buying a clunker cheap so you can trade it in. This also means you can’t trade in a car sitting in your driveway that hasn’t been registered.
No voucher needed, dealer will apply the credit - You have to find a registered dealer but after that the dealer takes care of the credit.
CARS runs until November 1st or when the funds run out - One billion has been set aside for the program so there is an aspect of first come first served.
The car you’re trading in must be destroyed/scrapped - Remember the point is to get the inefficient cars off the road. The trade-in value will most likely not exceed the scrap value. A dealer will have to provide you with an estimate of it’s scrap-value.
The car must be in drivable condition - It has to actually HAVE mileage in other words. No towing in a car that doesn’t work.
The new car must not exceed $45,000.
You can find your car’s fuel economy at FuelEconomy.gov.

Jalopnik has a great chart on what your trade-in value will be based on the car type and mileage:

What's your clunker worth?

This sounds like a great program but it has it’s limitations.

Cars that are traded in have to be not worth too much and also get poor mileage. Thing is, a lot of people who drive a car that fits that description may be driving them for a reason - they can’t afford a new car. The credit helps but those that couldn’t afford a new car probably couldn’t even with the credit. Also, some cars would be more valuable as a straight trade-in rather than using the Cash for Clunkers credit. This limits the amount of inefficient cars that get taken off of the road. Then there’s the dollar amount and time frame. The program is only set up to expire either after November 1st or until $1 billion in credits have been given out - whichever comes first. Countries in Europe have less stringent rules and have seen car sales improve dramatically. The US rules may limit the effectiveness of the intended program.

It’s a good idea though. This could help get some inefficient cars off the road while boosting cars sales. Even if many don’t qualify it still might make them consider trading in their car for a new model. The full details of the Cash for Clunkers program won’t be finalized until later in July so we may see some changes that make it more appealing.

What do you think about Cash for Clunkers?

Car Allowance Rebate System - Cash For Clunkers

US Savings Rate At 15 Year High

ffb — Tue, 30 Jun 2009 17:07:04 +0000

The Bureau of Economic Analysis is reporting that the personal savings rate reached a 15 year high of 6.9% in May! This is the highest it’s been since December 1993.

In recent years the savings rate has actually gone below zero %. This was back when credit was running more freely and Americans were spending more than they had. (Read: maxing our credit cards and using home equity loans as a source to spend).

Some would argue that this actually hurts the economy. See, when people save it means they aren’t spending. When we don’t spend as much companies don’t get as much income and the economy doesn’t grow.

I think it’s a good thing the savings rate has increased. Look, we’ve been spending more than we have as a country for too long. Look what happens to the economy when the debts catch up! Even though saving more can extend the recession, when we come out of the recession we will be better off. Once Americans have a chance to put away decent savings then they can to back to spending again but hopefully they will still have their savings should they need it.

To me the fact that the personal savings rate has gone up is a positive sign. People are starting to get the fact that you can’t spend everything you make and hope to always be ok. One thing this recession has taught us is that you need funds available when jobs become tight. We can’t even count on credit since many companies are closing accounts or cutting credit limits in this economic climate. You need to have an emergency fund.

We’ll get out of this recession. It may take some time but we will. Hopefully the recent rise in the personal savings rate will remain once we emerge from the recession and people will remember what got us into the recession.

What do you think of the current savings rate?

photo credit: kevindooley

US Savings Rate At 15 Year High

Personal Finance Resource Links 06-28-09

ffb — Sun, 28 Jun 2009 12:28:58 +0000

The sun has finally started to show itself around NYC! It’s summer and we have a little one due any day now. Life is good.

Now for some links:

BudgetPulse has re-vamped their site. For those who don’t know it’s a free budgeting software that’s simple, functional, and can help you take control of your finances. Check it out!

Jeff Rose wrote a mega post of 107 things that make good financial sense!

Frugal Dad lists 50 sites that can help you save money.

What does your new iPhone say about your bank account over at CNNMoney.

Fire Finance has updated their top 100 list of Personal Finance blogs. Free From Broke is in the top 45!

Prime Time Money gives us 5 money tips when you travel. I’ve got to get savvy with Skype!

Bible Money Matters questions whether the recent Cash For Clunkers program is a wise idea.

Remodeling This Life tells us what she loves right now.

Sense To Save relates how speaking up can get you free stuff.

MSN Smart Spending questions if the $8000 first time home buyer tax credit is a good idea.

Some carnivals I participated in:

Revenge of the Fallen - Festival of Frugality #182 at Stupid Cents. Oh, I was also an Editor’s Pick!

Lobster Roll Edition of the Carnival of Personal Finance at Money Under 30.

The Stanley Cup Final edition of the Money Hacks Carnival at Financial Highway.

The 1st edition of the Carnival of Everything About Personal Finance at Nil2Million.

The 209th Carnival of Personal Finance at Living Almost Large.

Father’s Day Edition of Carnival of Money Stories at Not The Jet Set.

“Four Pillars” Edition of the Carnival of Debt Reduction at, you guessed it, Four Pillars.

Punch Out Edition of the Carnival of Personal Finance at Suburban Dollar.

Carnival of Money Stories at Consumer Boomer.

Best of Money Carnival at Bargain Babe. I made it to this great top ten carnival!

Money Hacks Carnival at Blogging Banks

That’s it for this week’s edition! Check out all of the great articles.

Personal Finance Resource Links 06-28-09

Do You Keep Money Secrets From Your Spouse?

ffb — Thu, 25 Jun 2009 13:32:42 +0000

Have you ever kept money secrets from your spouse?

Do you have a bank account they don’t know about; maybe a credit card? What about little white lies such as the actual cost of something you bought?

Why do we keep money secrets from our spouses? What do you have to hide?

Here are some of my thoughts why we would keep a money secret:

Control - Being completely open means you have to explain every expense. Not everyone wants to do that. Some would rather not have to answer for their spending and would rather not be criticized.

Not wanting to change - If you tend to spend too much then you may not be ready to have someone, especially your spouse, reign you in.

You’re cheating - Yeah, this is a biggie. Someone cheating on their spouse has an incentive to have a secret credit card or bank account to spend with.

Shame/Embarrassment - Some people have bad money pasts. Maybe you made some unwise mistakes like racking up too much credit card debt. Maybe you don’t want your spouse to know you were bad with money thinking it’s a reflection of who you are.

Scared of reaction - The damage is done. But you’re not sure what your spouse will do or say if they found out about your money secret. Will they leave? Will the relationship be ruined? You think it might be easier to just not tell them.

Addiction - There are those that have a real addiction to spending. They can’t control themselves and do what they have to to feed the addiction.

Denial - You don’t even realize that you’re keeping secrets. Or at least won’t admit it to yourself. In you’re reality there are no money secrets.

I think you need to be honest with your spouse.

Here are some reasons you need to be honest with your spouse about your money issues:

Commitment - Marriage is a commitment. You make a pledge to be part of a union with another person. When you keep secrets you prevent this union from being. Sharing finances is part of the union.

A secret is a lie - Lies affect the trust between you and your spouse. You also open the door to lie about other things as well.

Your spouse is there for you - Your spouse is the column that’s there to hold you up when you have a problem. If your money issue is hurting you then enlist the help of your spouse and tackle the problem together. Your spouse fell for you for who you are in totality and that includes your flaws.

Intimacy - How close can you really be if you are keeping secrets? You may not realize it but the secrets you keep could be affecting your intimacy with your spouse. You know what the two biggest reasons for divorce are? Money and sex. When your intimacy is affected… well you understand.

It’s childish - If you’re keeping secrets because you don’t want to be told what to do then that’s childish. Fess up to your spouse and be an adult.

Communication - Secrets prevent open communication.

Kids - Your children see more than you think. They see how you treat money and this becomes their education. What are you teaching your kids?

How do you feel about keeping money secrets from your spouse?

Do You Keep Money Secrets From Your Spouse?

AAA Is Good For More Than Automotive Assistance

ffb — Mon, 22 Jun 2009 12:27:21 +0000

Are you a member of AAA (American Automobile Association)? They provide benefits such as roadside assistance, towing service, flat-tire service, battery service, and more for a registered driver. But did you know that AAA provides tons of great discounts as well?

We’ve had AAA now for years. I had heard that AAA offered discounts and every now and then I’d check the site out. Not sure why but I kept forgetting about their discounts. Well no more! I’ve been checking their discount page often recently. Every time we plan to take the family to an attraction I’ll check the AAA discount page (this brings you to the NY page) first to see what discounts they offer. Recently we’ve saved on Bronx Zoo and Intrepid tickets and we’re looking into Sesame Place discounts too!

Here are some of the discounts AAA offers:

Shopping

Barnes & Noble
Dell
Target.com
KMart
Carfax reports
Online Defensive Driver Course
Hotel Deals

Entertainment

Movie Tickets
Six Flags Amusement Parks
Sesame Place
Busch Gardens
Dorney Park
TicketMaster

NY Attractions

NY Aquarium
Guggenheim Museum
Circle Line Tours
US Open
Ripley’s Believe It Or Not

You also get access to AAA Tourbooks both printed and online. When we went to Disney World and Virginia Beach we asked for tour books so we can see what attractions were in the areas.

There’s also an iPhone App to help you find AAA discounts!

And check out the AAA Discounts Twitter profile too.

So if you have a AAA membership make sure you also take advantage of their great discounts and offers. If you’ve been considering becoming a member then perhaps the discounts will help sweeten the deal!

Are you a AAA member? What discounts have you taken advantage of?

AAA Is Good For More Than Automotive Assistance

Post Father’s Day Gift - TJ Maxx And Marshall’s

ffb — Thu, 18 Jun 2009 12:30:52 +0000

Father’s Day is approaching fast! If you still need a gift then a nice place to check out is TJ Maxx and Marshalls. They sell name brand items at discount prices.

Things you can find for your Dad:

Polo shirts
Khaki’s
Golf accessories
Watches
And much more…

In order to help you celebrate Father’s Day I have one $25 gift card from TJ Maxx and another from Marshalls to give out to two loyal readers (one card each reader).

Leave a comment on this post telling me what you’ll shop for with the gift card. I’ll pick two lucky readers and have the card sent out to you. You can leave a comment until Sunday midnight EST. I know this won’t get out by Father’s Day but you can still surprise the Dad in your life with a gift shorty after!

The first comment picked will get the TJ Maxx card and the second will get the Marshalls card. Spam comments will be deleted (I will be the sole decision on what is considered spam). One entry per email address. I will use a random number generator to determine which comment wins. Make sure you leave a valid email address. If the winner’s email doesn’t work then I’ll choose another winner. I will email the winners for mailing details.

So what would you shop for at TJ Maxx or Marshalls for Father’s Day?

Post Father’s Day Gift - TJ Maxx And Marshall’s

Confessions Of A Recovering Spendaholic

ffb — Wed, 17 Jun 2009 12:46:15 +0000

There was a time I spent a little too freely. I’d buy things when I wanted and worry about paying for it later on. For lunch I’d go out with the intention of window shopping to waste some time but come back with a sweater and new pants instead. It felt good when I’d buy something but the feeling would wear off especially when I’d get my credit cards bills which were slowly adding up in the thousands.

I’ve since curbed my spending ways (somewhat). But every now and then the itch returns and I get the urge to splurge. The frugal/saving side of my wants to let go. It’s like you see on a TV show when the devil and angel both appear on one of my shoulders and they argue it out. The angel usually wins out but sometimes the devil makes a good case!

So here are some confessions of a recovering spendaholic. These are things I sometimes think about and get the urge to spend on. I usually hold myself back but other times…

Buying things for the kids - Every now and then I’ll see something that I really want to get for the kids. I’m aware I could be spoiling them and odds are what I buy will end up as clutter but some things are just too cute. For example: We were out recently and I saw a Star Wars Yoda shirt that was just too cool to pass up (little guy loves Star Wars). I took our son and went and bought it for him.

I’ll go on Amazon and roam around looking for new things - I’ll go through pages of their Recommend stuff and add things I like to my wish list.

I love catalogs - We get a bunch of catalogs in the mail. My wife sees it a junk mail but I have to go through them and look at all of the cool new items. The seasonal Campmor catalog is like porn for me (Note - I just came back from checking out the sales on their site. Couldn’t help it!). I thumb through the pages and earmark things I want. Ahh, camping gadgets!

I want to buy what I want for lunch - Sometimes I’m working and I want to go all out and check out all of the interesting restaurants in the area. Too bad the area in Manhattan where the restaurants can be quite pricey.

I drool over the new aluminum Macbooks - I bought a refurbished Macbook back in November. I love it and it suits my needs perfectly. Still, I love the new aluminum ones and I’ll check the Apple site to see how much the refurbished ones cost.

I’d love to get an iPhone - Damn if iPhones don’t look cool, huh? Is there anything they can’t do? I mean if I had on I’d have to be more productive wouldn’t I? What keeps me in check is the monthly service charges and the fact that I already have the incredibly inexpensive Sprint SERO plan.

I want a “cool” stroller like I see in Manhattan - I walk around and there are so many fancy, space-age looking strollers everywhere. I want to stroll my kids around in one of them!

I’d love a new telephoto lens - I have a DSLR camera and already have a telephoto lens. But one of those huge lenses where you can get REAL close would be super cool to have. (I love looking through the giant B&H catalog).

Search online for messenger bags I want - I had a decent messenger bag that I used to go to work. I had it for years and it finally broke down to where it was unusable. Now I use a messenger bag I got from my company. It certainly serves it’s purpose but things just don’t fit “right.” So every now and then I look around for a new bag.

I need a hip Moleskin notebook - They look so cool. I check them out every time I’m on Barnes & Noble. I tell myself it’s for productivity and I could use it in all sorts of ways. I’d break down and buy one if I didn’t already have a perfectly usable notebook already (just not a cool one like a Moleskin).

I needed a Fisher Space Pen - I love a good pen that writes well. It’s a pet peeve of mine to use a pen that just isn’t good. I ran out of my current pens and I was already obsessing over the space pen. I gave in and bought it. It is really cool and closes real small and I carry it everywhere. Did I need it though….

Want to go out for dinner - We’ll go out to eat every now and then. We’re a lot better with our spending than we were when my wife and I were both working, bringing in two incomes. In fact we enjoy eating a home cooked meal with the whole family at the dinner table. But sometimes we just want to throw caution to the wind and eat out where we want and not worry about the cost.

I kinda want “too much house” - Yeah, a simpler lifestyle does actually feel good. But having a really big house can be fun too, right?

Looking forward to a flat screen TV day - One day we’ll have a flat screen TV. Eventually our TV will break down. Still, I’d like one now that we could hang on our wall. Yeah, it would look real cool up there watching Star Wars!

I drool over Guitar Hero and Rock Band - How cool of a video game are these?!? Not only can you play guitar but also drums?!? That’s awesome! Of course I’d also have to buy a video game system first.

Imagine the possibilities of open credit for Sam Ash or Guitar Center - Remember how I talked about the Campmor catalog as porn? Sam Ash and Guitar Center are worse! I walk through those stores and I have to remember to wipe the drool from my chin (ahhh, a PRS semi-hollow electric or a Warwick Dolphin, droool). My wife refuses to go to these places with me.

I need a fancy Bluetooth mouse for the laptop - There are just times when the tracpad gets tiring to use. For those times I need a mouse. But not a corded mouse. No, I want a wireless Bluetooth mouse.

On the subject of Bluetooth - Ditto an earpiece for my cell phone.

Neoprene cover for the computer - I have to keep the computer safe don’t I?

A couple of cool lightsabers - How else can I play Star Wars with my son without a pair of cool lightsabers?!? (I’m starting to see a bit of a Star Wars pattern here).

So there you go. Sometimes my mind wanders a bit and I start thinking about stuff I’d like to get. Usually I control these urges. Sometimes… Hey, it’s about moderation and knowing your financial situation. So long as you can live within your means and still save it’s ok to splurge every now and then.

What about you? What gets the spend urge going in you?

Confessions Of A Recovering Spendaholic

Use The First Time Home Buyer Tax Credit Now!

ffb — Fri, 12 Jun 2009 12:15:30 +0000

Were you considering buying a home this year and claiming the first time home buyer’s tax credit? If you were, a recent change to the credit may allow you to use it now rather than waiting until next year’s tax return.

The American Recovery and Reinvestment Act of 2009 allowed for a first time home buyer’s tax credit of up to $8000. This would be money that could be claimed on your tax return. Recent changes now allow a first time home buyer to apply the tax credit toward their down payment or closing costs.

From the US Department of Housing and Urban Development site:

Today’s announcement details FHA’s rules allowing state Housing Finance Agencies and certain non-profits to “monetize” up to the full amount of the tax credit (depending on the amount of the mortgage) so that borrowers can immediately apply the funds toward their down payments. Home buyers using FHA-approved lenders can apply the tax credit to their down payment in excess of 3.5 percent of appraised value or their closing costs, which can help achieve a lower interest rate.

The HUD site also has the Mortgagee Letter detailing the process.

Here’s a rundown of the tax credit:

This must be a FHA-insured home (your mortgage has to be backed by FHA).

This can be used towards the down payment or for closing costs.

As a down payment, the buyer must still put down 3.5% first. The credit would be in addition to the 3.5%.

The home must close before December 1, 2009.

The credit does not have to be paid back unless the home is sold before you have lived there for three years.

This should really help stimulate home sales! Not only will it help first time home buyers purchase their home but it will also help current home owners sell their homes and move to new homes (some of the people the current owners will be selling to will be the first time home buyers). This will also help first time buyers get lower interest rates because of a bigger down payment.

What do you think? Are you planning on using the first time home buyers tax credit?

Use The First Time Home Buyer Tax Credit Now!