Did you know that along with the $8,000 tax credit that many first time homebuyers are eligible to receive, mortgage interest, property taxes, and seller paid points are also deductible? On a mortgage less than $175,000, the sum total of these benefits is nearly the same as the total of the first year's mortgage payments!

3-2-1 Buy down In some cases sellers are reducing their asking price significantly to attract buyers in today's market, but oftentimes sellers (and buyers) are better off financially if they "buy down" the buyer's interest rate rather than lowering the purchase price of the home. Doing a buy down involves discount points being paid by the seller or buyer to lower the interest rate on a buyers mortgage. A point is equal to one percent of the principal amount of your mortgage. For example, if you get a mortgage for $100,000, one point means you pay $1,000 to the lender. Lenders frequently charge points in both fixed-rate and adjustable-rate mortgages in order to increase the yield of the mortgage and to cover loan closing costs. These points are usually collected at closing and may be paid by the borrower or the home seller, or may be split between them.

Sample Scenario with a $175,000 Mortgage.
With a point being 1 percent of the mortgage amount, $175,000 mortgage x 1 point = $1,750. Lets say that the current interest rate is 5.5 percent. If the buyer or seller pays 4 points, or $7,000, the buyer could secure a "3-2-1" buy down. This means that the buyers first year interest rate would be 2.5 percent, the second year rate would be 3.5 percent, the third year interest rate would be 4.5 percent and the remaining 27 years of the mortgage would be the note rate of 5.5 percent.

Benefit to the qualified first time homebuyer:
Tax credit:$8,000Interest deduction:$1,093 (assuming a net Federal bracket of 25 percent)
Property tax deduction: $500 (assuming property taxes of $2,000 and buyers net tax bracket is 25 percent)
Buy down points deduction:$1,750 (assuming net Federal bracket of 25 percent of $7,000 paid)
Total net refund to buyer:$11,343
Buyers first year costs: Principal and Interest: $8,280Taxes:$2,000Mortgage Insurance Premium: $960Insurance: $900Total first year costs: $12,152In addition to these tax benefits, a buyer saves $7,400 in total payments in the first three years under this buy down plan..