Part of the Housing and Economic Recovery Act of 2008 is a tax credit for first-time buyers purchasing a home between April 9, 2008 and July 1, 2009. The government will hand over up to $7,500 to you, if you qualify. The catch is that you have to pay back the IRS over the next 15 years.

The deal sounds pretty good on the surface. Sure, the money is really a loan, rather than a tax credit. But you get a whole 15 years to pay it off and there’s no interest. But is that free money really a good choice?

The National Association of Home Builders certainly thinks you should take the credit. If you look at their home page, you’ll see that they’re describing the temporary tax credit as “the opportunity of a lifetime.” The government did create the tax credit, after all, to boost sales of both existing and new homes. NAHB’s membership has had a rough year, too.

But just because a loan is interest-free doesn’t mean that you should take it. If you can’t afford to pay back a loan, you shouldn’t take it. It doesn’t matter how good the terms are. After all, you’ll be making mortgage payments as you try to pay back your ‘tax credit.’ If you miss a payment or don’t repay the loan, you’ll get hit with the IRS’ standard penalties and fees for outstanding tax debt. That’s 0.5 percent each month just for the penalty, and there is no maximum penalty. On top of that, the IRS charges another 5 percent per year on unpaid taxes. It just gets scarier and scarier.

There’s another catch that comes with the tax credit: if you sell your new house, the balance becomes due immediately. If you buy a house now, do you really think you’ll be in the same house 15 years from now? You may think so, but statistics say no. You’ll probably be moving in the next six years or so.

You can’t just move what you owe on your tax ‘credit’ over to a new home. The IRS expects you to pay off the balance out of your profits from the sale. If your sale isn’t profitable enough to cover it, the money comes out of your pocket.

Now that I’ve scared you with all the details of the the temporary tax credit, though, I’d like to say that it’s not necessarily a bad deal. If you really do need the money, this loan has much better terms than adding to the debt on your credit card. If you wound up in a mortgage that is less affordable than you thought and you qualify for the tax credit, I’m all in favor of taking it. Pay down your mortgage with the money. Yes, you’ll still owe that $7,500, but there won’t be any interest accruing on it.

It’s really a question of whether you need the money — not want it. Don’t take the credit if you plan to use the money for anything that loses value. But if you plan to use it for paying down debt or something similar, go for it.

Last week, two of my friends closed on their first home. It’s a beautiful house, great neighborhood, big yard. It’s everything they could ask for, but that perfect home is coming at quite a price.

My friends decided that now was the ideal time to buy, because home prices have dropped significantly in our area. Their logic is easy to follow: no one really knows just how low the market is going to go, so why take the risk that prices might begin to rise before they lock in that low home price? Sure, they might miss out on a significantly lower price, but then again they might not.

But, despite the low price they’ve found, my friends aren’t in a good position to buy. They didn’t save up a down payment before buying, which is usually a red flag. The mortgage crisis has guaranteed that they couldn’t get a zero-down mortgage, but they’ve managed to find the next best thing. 401(k) programs (along with some other retirement savings programs) allow you to borrow money from your account for little things like major medical expenses and purchasing a home. There are a few catches, though:

• you have to repay that money, and fast! You may have only five years to get that money back in your account or face major tax penalties.
• you lose out on any interest your retirement savings was earning.
• you often have to pay taxes or penalties on your withdrawal.

Many homeowners used their 401(k) savings to help them make a down payment, but as a general rule, it’s not a good idea. Doing so puts a person on pretty shaky financial ground: not only would you need to make your mortgage payments but you’d be making another large payment to get that money back into your retirement account. Essentially you could be putting both your new home and your retirement at risk.

Even if you’re sure that you can handle double payments, you’ll probably be better off saving up money for a down payment. Yes, you won’t get into your dream house right now, but you’ll increase your ability to keep that perfect house. And with a little effort, you may be able to surprise yourself with how fast you can save up for a down payment. You’ll have less debt overall, as well: while money withdrawn from your 401(k) is yours, the need to repay it or face penalties can turn your retirement savings from an asset into straight out debt.

My friends decided to take the risk, and that’s their — and your — choice. But piling that risk on top of a problematic real estate market seems to be asking for trouble.

Many first-time home buyers go shopping for a home thinking that they’ll find the perfect house and live in it happily ever after. It just doesn’t work that way. Even if a member of your family doesn’t get a job halfway across the country, it’s likely that you may want to change school districts, find a home with different amenities or move closer to family. Simply put, odds are that you’ll move at least once every five years.

As you look at homes, think long and hard about whether you’ll be able to sell it later on. For instance, is the design dated? There are plenty of homes that just scream “1970s” when you walk in — you might like that aesthetic, but it’s going to be harder to sell, without significant changes. (The current seller may be finding out just that, as well.)

A key question is whether you’ll need to do significant work on the house after you’ve lived in it for five years, or so. If the kitchen is brand new right now, it probably won’t need much effort to get it ready in a few years. But if the kitchen is already starting to seem a bit dated — older appliances, cabinets showing some wear — you may need to prepare yourself to spend some money down the road. You may be planning for such a remodel anyhow, for your own use of the kitchen, but a fairly new kitchen is practically a requirement when you plan to sell.

There are certain amenities that may be a must have today, but will make a house harder to sell down the road, as well. Consider the bathtub: there have been plenty of trends, such as whirlpool tubs, when it comes to bathtubs. And there’s plenty to be said for whirlpool tubs — they can be a nice luxury. But it’s much harder to sell a home with a whirlpool tub these days. Parents worry about their children’s safety, efficiency-minded buyers worry about the amount of water need to fill the tub, etc. You can always change out a tub down the road, but these sorts of amenities cost money, both to install and to remove.

Selling your future home shouldn’t be your primary concern when you are house hunting. However, it is a factor that you should take into account, just as you consider your wish list of amenities
in your new home: you may be willing to make significant changes to a house to make sure it meets your needs. Are you willing to make that level on investment in order to make sure that it also meets the needs of prospective buyers down the road?