Do Bonds Equal Credit Card Debt?
 

I was reviewing new home bonds at 30K plus range and at interest rates between 3 and 5 percent. It feels like with your new home purchase you accept this bad debt. Can you explain another way of looking at it? Thanks

The $30K is to pay for the infrastructure needed for the house. If you consider debt to be bad, then, yes it is bad debt and you have to accept it. But, you can pay it off anytime you want. If you buy a new house without a bond, you are still paying for the infrastructure, but it is built in to the price of the house or included in your taxes.

No.

As I understand it, every new house comes with this debt.

The bond on your home, while a debt that you owe, is not reflected on your credit report. It is not a "bad" debt as in high risk or in default, it is just a part of the cost of a home in a new development. As retiredguy123 has said, you will be paying this no matter what, it's just a matter of it being rolled into the cost of the home or not. If you view debt as a bad thing, as I do, then yes it would be bad and it should be paid off as soon as you can. "...the borrower is slave to the lender..." Provers 22:7

The problem with paying off the bond early is that if you decide to sell your home the prevailing wisdom you will not get more for your house since you have no bond.

The difference if you sell your house...
Your Bond debt goes to the buyer
Your Credit card debt stays with you

Is there a reason the bonds are separate from the house cost? At least if you had a mortgage it would be deductible.

Yes. The bond is based on the total cost for the infrastructure for a particular area of construction. Every house of the same type (designer, villa, etc.) constructed within that area will be assessed the same bond amount regardless of the size or price of the house. So, a $500K designer house will have the same bond amount as a $350K designer house. The bond interest is not tax deductible because it is not based on the value of the house. The IRS only allows tax deductions for mortgage loans that are based on the value of the house. And, obviously, by not including the infrastructure cost in the price of the house makes it easier to sell the houses, and easier to get mortgages.

Call it what you want, it's the cost of the home. That is one of the reasons we bought in the northern part of the Villages, where our bond was already paid off.

From a business standpoint it is a huge positive cash flow advantage. Consider that the infrastructure work starts up to 2 years prior to the sale of the first house. With a bond the CDD pays for the infrastructure as it is built, the developer gets paid for this work instead of having to carry the cost for up to 2 years before they START to get paid. If the cost is rolled into the house then it takes until the last house is sold before they fully recoup the infrastructure investment (it actually would happen sooner but at the cost of a reduced profit margin, if any, per house).

Many developers go under because of the carry time for the development costs.

The other advantage for us as residents deals with capital availability. The developer only has so much in the budget to develop the community, by not having to carry the cost of streets and sewer pipes they can invest the money in other things like swimming pools, golf courses, rec centers. This is way in many communities the sales pitch is that "that will be the pool over there" or "you'll be on the tee box for the 3rd hole" but it never happens, they run out of money.


You'll pay the cost one way or the other.

The bond process is, in my opinion, one of the key reasons that The Villages is successful. Allowing the early building of the amenities. Believe it or not, the amenities are still being built in advance of the homes as they always have been. What many think of as amenities (shopping, championship golf) are not amenities, they are private businesses. These have to make a profit to survive and have to wait for the homes to be occupied before being built. The non-linear and fragmented development of the area south of SR44 has made this much more difficult than the contiguous linear building that allowed commercial development along 466 and 466a.

This video Bond Information and The Villages 5-30-19 Construction update - YouTube talks about the bonds here in The Villages.

Being "tax deductible" is a story the banks like to tell you, so you'll pay them $10,000 in interest each year just so you don't pay the government $1,000 in taxes each year. While I think the banks are smarter with their money than the politicians are with our money, I'll still take the lesser amount.

Bonds in The Villages
 

A bond is a cost, just like the price of the house is a cost. Either one becomes a "debt" when you choose to finance it. In my former home state, the development cost was folded into the cost of the home. By keeping it separate, you actually lower your property tax by the amount of the bond.

Deductibility of Bond Interest
 

There are two parts commonly called "bond" which come with your tax bill. There is bond maintenance, which pays for upkeep of the common areas in your CDD -- mowing, replanting of flowers, etc. This is non-deductible. Then there is the capital bond, which paid for the infrastructure early in the construction and development. Interest on the capital bond IS tax deductible (just as it would be if the developer had rolled the infrastructure cost into the price of your house) assuming you itemize. You can go to Village Community Development Districts and look up the amount of your bond and the interest rate you are paying.

There are two items on your tax bill commonly called "bond." One is the maintenance bond, assessed annually by your CDD, which pays for upkeep of the common areas. This part is not tax deductible. The other is the capital bond, which paid for the streets, sewers, lighting, etc, early in the development process. As pointed out above, this cost could have been rolled into the price of the house, so interest on this debt is properly considered interest on a portion of the cost of the house, which is tax deductible assuming you itemize. You can go to the VCCDD web site and look up the amount of the capital bond, the yearly amount allocated to interest and to capital payoff, and the interest rate, to decide whether it makes sense to pay off the bond early.

But it makes your house easier to sell. No bond is a big plus.