Friday, February 23, 2007

Private Mortgage Insurance (PMI) Update—Now Tax Deductible


Starting on January 1, 2007, private mortgage insurance became a deductible expense for new borrowers with less than a $100,000 income. This new legislation will help homebuyers who may have chose to a more risky piggy-back type of loan to avoid PMI over the past few years.

So what is PMI?

In a conventional mortgage, a buyer is required to put down a 20% down payment based on the sale price of the home. Private mortgage insurance is paid when a buyer does not the full 20%. The fee is paid monthly by the buyer to protect the lender in the event of foreclosure. It is paid until equity accumulates to a point where there is 20% ownership of the home.

Avoiding PMI with Piggy-back Loans

In recent years, many buyers in an effort to avoid paying PMI have used a piggy-back or secondary loan for their down payment. In this scenario, the second loan is often similar to a home equity loan. Often it will be have an adjustable interest rate and/or a balloon payment that will come due in 3 to 5 years.

So Which is Best? PMI or Piggyback?

It will really depend on your situation. With the deductible aspect to PMI, it is worth considering again. If your home appreciates or you are able to put in some “sweat equity” to increase the accumulated equity of the home to the 20% of the appraised value, in most cases the PMI will be cancelled. However with a second loan, you will continue to make payments until the loan is paid in full.

To make the best decision, discuss your all options with your Realtor and Mortgage or Loan Officer. Working with trusted professionals to explain all aspects of various loan products help you to select the best mortgage that works to meet your financial goals.