The state is sharply increasing its allotment of federal mortgage tax credits in an effort to help more people afford a home in one of the country's priciest markets.

The Hawai'i Housing Finance and Development Corp. recently announced that next year it will offer a record $15 million in credits, or five times the department's $3 million average and double the most recent allocation of $7.5 million in 2004.

Department finance manager Darren Ueki said the state's hope is to raise participation in what has historically been a little-known and underused program.

"It's not costing us anything," he said. "It becomes a federal subsidy."

The tax credit, called the Mortgage Credit Certificate, was created by Congress in 1984 and has been available and administered in Hawai'i by the state since 1989.

The program works by giving homebuyers a federal income tax reduction equal to 20 percent of mortgage interest they pay every year, effectively letting buyers keep more income to qualify for a bigger mortgage.

On a 30-year loan of $250,000 at 6 percent interest, first-year interest equals $14,916 of which 20 percent, or $2,983, becomes a tax credit under the program.

In the example, the credit allows a recipient to increase take-home pay by $249 a month by adjusting withholding taxes.

Also, the typical itemized deduction homeowners can take for mortgage interest can still be applied to 80 percent of the interest paid on the home loan.

O'ahu resident Heidi Loayza used the tax credit program to buy a Makiki condominium in August with her husband, and said she anticipates saving $300 a month.

"Great program," she said. "It's an excellent resource for first-time home buyers."

To qualify for the mortgage tax credit, buyers must reside in the home being bought and may not have owned a home within the previous three years.

Buyers also cannot exceed income limits that on O'ahu are $85,560 for a family of three or fewer and $99,820 for a family of more than three. Limits are lower on the Neighbor Islands.

Lastly, there is a home price limit of $644,429 on O'ahu, Maui and Kaua'i, and $505,125 on the Big Island.

But since it became available in Hawai'i, the credit has been used by only 700 homebuyers, an average of 41 a year.

Of 2004's $7.5 million allocation, $3.8 million remains unused and will expire at the end of this year.

Manuel August, president of Asset Mortgage of Hawaii, said one of the main obstacles to the program gaining wider use is that it's difficult to explain, understand and process. "The public thinks anything to do with taxes is too complicated," he said.

August, a former accountant and Wells Fargo Home Mortgage of Hawaii loan officer who started Asset Mortgage last year, said he's bullish on the credit and has processed about a dozen since his firm began participating in the program earlier this year.

Loayza, the Makiki condo buyer, read about the program in the book "Home Buying For Dummies" but said it was difficult to find loan officers familiar with the program.

Ueki said his agency is limited as to how it can promote the program, and largely relies on 12 participating lenders and mortgage brokers to drum up business for the credit that can be difficult to explain and requires added paperwork.

"It's hard for the state to get banks to promote the (tax credit)," he said. "It doesn't have the glitz and glamour of the Hula Mae (low-interest loan) program. A bank can say, 'I can give you a loan for 4.5 percent' — that gets your attention."

But Ueki said the tax credit combined with a market-rate loan in some cases can save more money than a 4.5 percent Hula Mae mortgage. (The two programs cannot be combined.)

Still, there are caveats to the tax credit that could reduce its benefit, including the possibility of the government reclaiming some of the credit if a participant sells their home within nine years, sells their home for a gain or if their income increases above a certain level.

The state also at times may be constrained in its tax credit allocations, because for every dollar in credits offered, the state must reduce its ability to borrow money by $4. So to offer $15 million in credits, the state's bonding capacity is reduced by $60 million.

"We feel we have the resources available," Ueki said. "We want to use as much as we can."

MORTGAGE CREDIT CERTIFICATE DETAILS

A homebuyer receives a federal income tax reduction equal to 20 percent of mortgage interest paid annually.

That's a $2,983 credit in the first year on a $250,000, 30-year loan at 6 percent interest.

By adjusting withholding taxes, the credit can be taken as $249 in additional monthly take-home pay.

Participating lenders