San Francisco Schtuff

By: Jason Russell

I’ll end the year by offering a few thoughts about the new tax law that was passed as one of the last acts of the 109th Congress – providing a tax deduction for PMI, known better as mortgage insurance.

When you buy a house and make less than a 20 down payment, lenders give you one of two options to compensate for the absence of a 20% down payment - mortgage insurance or a piggyback loan (known also as a 2nd mortgage).

Mortgage insurance is the old-school method. The borrower (you!) pay for the policy, but the lender is the beneficiary. You are essentially paying to guarantee you can make your payments. If the lender has to foreclose, the mortgage insurance policy reimburses the lender for the associated costs. Premiums depend on the size of the loan, down payment, your credit score and the type of mortgage insurance you opt for. What people fail to realize is that you are not only paying the entire financed amount but the PMI as well (90%, if you have a 10% down payment, for example). This is a strategy without merit in my opinion.

Piggyback loans or 2nd mortgages loans are the new way of dealing with a down payment of less than 20 percent. With a piggyback loan, you have two home loans: a 1st loan of 80 percent and a second mortgage for the balance. With a 5 percent down payment, you would get what’s called an 80-15-5 mortgage: an 80 percent loan, a 15 percent piggyback and the 5 percent down payment. The 2nd loan is either a fixed-rate home equity loan or a variable-rate home equity line of credit and eliminates the need for PMI.

Although many experts argue PMI is logical and should be examined as an alternative to a 2nd mortgage. I would not recommend this option for anyone – partly due to the flawed logic of PMI and partly because it won’t apply to many of us (good reasoning, eh ?). Would you pay an insurance policy that names your doctor as the beneficiary? To me, PMI seems similar to this idea. The tax deduction applies only to mortgages that are closed in 2007, has income limits (you get the full deduction if your income is $100,000 or less and phases out rapidly after that; no mortgage insurance deduction is available if you make more than $110,000).

My 2 cents – I have always felt as if PMI was a waste of money – and I have a feeling the lobbying to pass this tax break was heavily funded by the folks that write private PMI policies.

Rates are looking very attractive – rates are in the low to mid 6% range. If you are holding a short-term loan that will start to adjust before you plan to move or sell the house, you may think about a refinance into something more stable. You do sacrifice the lower payment you have now, but it may pay off in the long run – as most economists are pointing to higher interest rates in the future.

Happy New Year….Please let me know if I can be of assistance.

 

Best Regards – Jason

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Jason Russell, Broker
Rob Wolf and Associates
Residential & Commercial Financing
850 Montgomery Street, Suite 100
San Francisco, CA 94133
1-415-788-1334 – office
1-866-313-5709 – fax