Mortgage Insurance Deductible in 2007

First of all, HAPPY NEW YEAR to all our our readers.  We hope you had a safe and joyous Holiday Season and wish you all the best in the coming year!   Now, right to business....

Mortgage Insurance is getting a temporary face lift this year and should become a more attractive alternative to home buyers looking to finance their purchases with mortgages for more than 80% of a homes value.  Just prior to adjourning, our most recent Congress passed legislation making mortgage insurance tax deductible for 2007.  (and only 2007, it must be renewed by Congress to apply beyond 2007)

What does this mean for borrowers?  A Lot!  Many of the folks that come to us have many more questions than they have answers, and that is perfectly fine, because that is what we do, We answer their questions and then they answer ours, and we then review the options and alternatives for financing that best meet their particular needs.  However, one of the 'answers' that they do frequently come to us with is " I do NOT want to pay for mortgage insurance".  For a variety of reasons, some valid, some, not so much, mortgage insurance has gotten a bit of a bad reputation. 

Mortgage insurance is insurance paid for by the borrower for a policy that covers the lender in cases where the Loan -to Value (LTV) ratio is greater than 80%.  Lenders look at these situations as having a greater degree of risk for them, and will make the loan contingent on the borrower paying for a mortgage insurance policy to "cover the lender's backside"  for this increased risk .

Another way for borrowers to secure financing for greater than 80% of a home's value is  to use a 'piggyback' loan, sometimes called an 80/20,or an 80/10/10.  In this case, the borrower takes out a primary mortgage for 80% LTV, and a second mortgage for the balance owed.  This second Mortgage can be a Home Equity Line of Credit (HELOC), which usually has a variable rate higher than the first, or a fixed rate Home Equity Loan, again, with a rate higher than the first.  The advantages are twofold: First, the borrower does not need to purchase Mortgage insurance, and Second, the interest on these loans is tax deductible.  The second point is one of the attractive things about using this alternative.

When we review our customers' situations, we review their available cash and  try to get a good idea of what we call their 'horizon'.  In other words, what are their plans and goals for the future regarding this property and the financing being considered?   Will they be holding the property for a long time?  greater than 10 yrs?  Do they plan to refinance in the near future, 2-3 yrs, to either finance renovations or take advantage of anticipated changes in their borrowing status?  Do they plan on using funds from an IRA or 401K as down payment money?

Depending on the answers to these and other questions, sometimes it makes more sense to go ahead and pay the mortgage insurance, even if it is more expensive in the short term.  First of all, it is possible, in many cases, to cancel this insurance when the LTV reaches 80%, and then a borrower is left with only the primary mortgage payment.  Equity loans and lines cannot be canceled, they must be paid in full.  Also, if the borrower intended to make a withdrawal from a 401K or IRA, there are lost interest and penalties to factor into the mix.

Regarding this tax law change, as I mentioned, it is good only for loans that close in 2007.  You cannot take it this year if you refinanced in 2006.  Also, it does need to be extended beyond 2007, and there are limits to income. Your adjusted gross income must be less than $100,000 to get the full deduction.  Even so, at least some of the stigma attached to paying for mortgage insurance has been removed, and it enjoys a somewhat more level playing field in 2007.

If you are considering a home purchase or refinance, speak to a lender who will take the time to review your situation and explore all of the risks, alternatives and benefits to the various products that are out there.  

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