Don't over look a 15-year old tax break if affordability becomes an issue in today's market of volatile mortgage rates and booming home prices.

Mortgage Credit Certificates (MCCs), authorized by the 1984 Tax Reform Act, are designed to assist low- to moderate-income families and individuals buy their first home, when they might not otherwise be able to afford it.

The tax credit allows you to use more of your income for your monthly mortgage payment and it allows you to make a greater portion of your income available to qualify for a mortgage.

How it works

With an MCC, 10 to 20 percent of the annual mortgage interest you pay to the lender is refunded to you as a federal tax credit.

As explained in Internal Revenue Service Publication 530, "Tax Information for First-Time Homeowners," the credit is subtracted, dollar for dollar, from the income tax owed.

For some that can mean dramatic savings. If you paid $10,000 in interest, and your tax credit rate is 20 percent, for example, your tax credit would be $2,000. To claim the credit, you must complete IRS Form 8396 "Mortgage Interest Credit". The remaining 80 percent of the interest -- $8,000 -- is taken as a typical mortgage interest deduction.

Because the tax credit is subtracted from the tax you owe, you can see the the benefit immediately in your paycheck by adjusting your W-4 exemption status.

In many cases, lenders will qualify you for a loan based on the monthly mortgage payment minus the tax credit, enabling you to qualify for a larger loan.

Review your personal financial status to determine if the W-4 adjustment or a possible tax refund is your best choice.

Eligibility requirements

Generally, the MCC program is for first time home buyers (anyone who has not owned a personal residence in the past three years) whose household income falls below the maximums set by your area's MCC program coordinator.

Your MCC program coordinator also sets the tax credit percentage (10 to 20 percent) and the purchase price limits for both new and resale homes. You must purchase a home in the area where you receive the MCC. Some MCCs are designated for target areas where the allowable cost of homes purchased and income levels can be higher than in non-target areas.

An MCC target area is an area where 50 percent or more of the households earn less than 80 percent of that area's median income, according to Tracy Cunningham, Santa Clara County's (CA) MCC program coordinator.

"The idea is to promote home buying in stressed areas. The first-time home buyer requirement is also waived," Cunningham said.

More details

An MCC is valid for the life of your mortgage, provided you remain in the home purchased with the MCC. If you move, you lose the MCC. If you sell your home within nine years of the purchase, you must repay the tax savings. The same is true if you sell your home at a gain or if your income increases above a level specified by your MCC coordinator.

MCCs work with many types of mortgage and loan programs, including Federal Housing Administration (FHA), Department of Veterans Affairs (VA), other low-money down loans and those with relaxed qualification requirements.

In some areas, you can also refinance MCCs as a Refinanced MCC or RMCC. You must contact your MCC coordinator, about obtaining an MCC or RMCC before you get a mortgage and buy your home because you must use a participating lender who has been trained in the MCC process.

MCC coordinators are typically your county housing department, housing authority or housing finance agency. A coordinator list is available on the Internet and by calling the Federal Information Center at (800)688-9889.

If your Web browser doesn't give you access to the Adobe Reader.pdf file version of the tax documents mentioned above, look them up and down load them in the format you can use from the IRS's Forms and Publications area.