Monday, January 1, 2007 - New Tax Deduction Will Make Housing More Affordable

Borrowers closing loans to purchase homes in 2007 who have annual household incomes of $100, 000 or less will be able to get a low down payment mortgage and deduct the full cost of their mortgage insurance premiums on their federal tax return.  Make up to $110,000 and you'll be permitted to deduct part of your mortgage insurance.  Any more than that and, unfortunately, you're out of luck on this one.

Unlike a mortgage, which you'll probably pay for decades, private mortgage insurance can come to a relatively quick end.  You can usually cancel it when you have at least 20% equity in the value of your home.

Remember: The mortgage insurance contract must be issued in 2007, and currently only 2007, unless they extend it.

Myths and Facts About "Piggyback" Loans

Some loan originators have been promoting "split" loan structures such as 80-10-10 loans where the home buyer puts 10 percent down, borrows another 10 percent through a second mortgage (with a higher interest rate) and finances 80 percent through a conventional mortgage. For many typical home buyers, a single mortgage with cancelable private mortgage insurance (PrivateMI) makes more sense than 80-10-10 loan deals.

Following are some myths and facts about 80-10-10 loans:

Myth: An 80-10-10 loan is a better financing option for home buyers than a single loan with PrivateMI.

Fact: For many home buyers, a single mortgage with PrivateMI makes more sense than so-called "piggyback" loans. PrivateMI enables home buyers to put down as little as 3 percent and even less for qualified borrowers, while an 80-10-10 structure requires a 10 percent down payment. Once enough equity is achieved along with a good payment history, PrivateMI can be canceled.

Myth: 80-10-10 loans are less costly than a loan with PrivateMI, because homeowners do not have to pay PrivateMI premiums.

Fact: PrivateMI generally costs less over the life of the loan. When comparing costs between a single mortgage loan with PrivateMI versus an 80-10-10, the loan with PrivateMI typically results in lower monthly payments and lower life-of-loan costs. When cancellation is factored in, the savings are even greater.

Fact: 80-10-10 loans often have balloon payments which cloud the financial horizon. While originators of 80-10-10s typically amortize the second "10" over 30 years to minimize monthly costs, they "call" the mortgage after 5, 10 or 15 years. This results in a balloon payment that most borrowers will have to pay either by tapping their home equity or by obtaining a new loan, often at less favorable terms.

Myth: 80-10-10 loans are a good financial choice because the interest on both loans is tax deductible.

Fact: Home equity and family wealth grow faster with PrivateMI. Equity accrues faster using a loan with PrivateMI than with an 80-10-10 since more of each monthly payment goes toward reducing the principal balance (due to lower interest costs). 80-10-10s create a second lien at origination, meaning that borrowers will find it more difficult to tap their home equity for other things such as college tuition, furniture or home improvements.

Furthermore, payments on the second mortgage do not stop until the loan is paid in full, while PrivateMI payments can be canceled when enough equity is accrued. Borrowers also may receive a refund of PrivateMI premiums, depending on the payment plan selected at origination.

Myth: Homeowners can pay lower interest using an adjustable rate 80-10-10 loan.

Fact: A single mortgage loan with PrivateMI is more predictable than a piggyback loan with an adjustable rate. Many 80-10-10 structures use introductory adjustable interest rates to keep down costs. However, when interest rates rise, homeowners find that their total monthly mortgage payment increases as well. In contrast, a single mortgage loan with PrivateMI represents a fixed cost.