Save Money Mortgage Insurance Premium
Mortgage insurance premiums become
deductible this year
New legislation was passed last year that allowed
taxpayers who itemize their deductions to deduct premiums paid for mortgage
insurance.
Before this, only the interest you were paying on your mortgage was
deductible, and then only if you itemized deductions.
By Brett Richards found at newarkadvocate.com
July 28, 2007
However, as with most legislation, there is a hitch to Before
this, only the interest you were paying on your mortgage insurance
contracts issued in 2007, and it only will be available to those taxpayers whose
adjusted gross incomes do not exceed $110,000 or $55,000 for married taxpayers
filing separately.
I have heard Congress may choose to extend it past 2007 if it helps pick up
the housing market and cuts down on the default ratios. For now, it appears they
are only testing the waters.
So what exactly is private mortgage insurance?
First, let me tell you what it's not. It's easy to confuse PMI with other
types of insurance associated with homeownership. PMI is not mortgage life
insurance, which pays off a mortgage if you die or become disabled. It is not
homeowners insurance, which protects you from loss from theft, fire or other
disaster. These are the most common misunderstandings most people have.
What PMI does is protect lenders and investors against loss if a borrower
stops making mortgage payments. PMI makes it possible for lenders to loan money,
and it creates homeownership opportunities for many low- to moderate-income
families. It is the easiest, most flexible and least expensive way to buy a home
with a little or no down payment. It makes it possible to buy a home with a down
payment of as little as 3 to 5 percent and even less for some qualified
borrowers, instead of the 20 percent down payment lenders traditionally have
required for loans without insurance.
With PMI, the average home buyer can buy a house 10 years sooner by making a
3 to 5 percent down payment instead of waiting to save enough for a 20 percent
down payment. PMI can be canceled once the homeowner builds up enough equity in
the property. On most loans, PMI is canceled automatically when the mortgage
balance reaches 78 percent of the home's original value.
PMI offers home buyers many benefits:
If you are a first-time buyer, PMI helps you get over the biggest hurdle to
homeownership, and that's coming up with the traditional 20 percent down
payment. So you can buy a house and start building home equity years sooner.
 | If you are a move-up buyer and have enough income, PMI allows you to
consider a wider range of homes. If you have $15,000 in savings or in equity
in your current house and make a 20 percent down payment, you can buy a
$75,000 home. With 10 percent down and a PMI insured loan, you can buy a
$150,000 home. With 5 percent down and a PMI insured loan, you can buy a
$300,000 home.
| So you benefit by putting less money down and keeping cash for additional
investments, eliminating debt, making home improvements or paying for a
college education.
| If you itemize on your taxes, PMI can save you money. The larger loan
amount that results from a low down payment boosts your tax deductions for
mortgage interest. By buying a home sooner with PMI, you can enjoy the tax
benefits of homeownership.
| PMI is cancelable, which means you stop paying for it once you achieve
sufficient equity and a track record of on-time mortgage payments.
PMI is available on a wide variety of loans and loan amounts. Your lender
can help you determine which premium plan is right for you. Your lender also
will make all of the arrangements for obtaining the insurance policy from
the PMI Company. Lenders typically pass the costs of lending money on to
borrowers, and PMI is one of those costs. Lender-paid policies also are
available, but they will result in a higher interest rate on the mortgage.
The cost of PMI depends on several factors: the size of your down
payment, the type of mortgage you are getting and the amount of coverage the
lender or investor requires on your loan. Make sure you ask your lender
about premium costs for your loan. PMI companies have created a range of
premium options to meet your needs:
| MONTHLY PREMIUM: This is pay-as-you-go insurance. With this plan,
your PMI payment is folded into your monthly mortgage payment. It is a good
choice if you want to minimize your closing costs.
| SINGLE PREMIUM: With this plan, you finance a one-time premium as
part of your loan. It is ideal if you want to keep both your closing costs
and your monthly mortgage payments at a minimum.
| ANNUAL PREMIUM: This plan allows you to pay an up-front premium,
which can be financed with an annual renewal.
| LENDER-PAID MORTGAGE INSURANCE: With this plan, the lender pays the
PMI premium. You pay a higher interest rate for the life for the loan to
cover the lender's higher cost of loaning you money. This plan reduces
closing costs and monthly payments for borrowers, but it cannot be canceled.
PMI companies make an effort to help you hold onto your home if you run
into financial difficulty. PMI companies know their success rests on your
success, and they work with lenders to help you minimize the risk of losing
your home if you run into difficulty making mortgage payments. If you lose
your job, get divorced or encounter other problems, PMI companies will try
to help you find ways to make your mortgage payment, protect your credit and
your investment in your home. PMI companies will work with lenders to
restructure payments and terms, forbear from collecting the loan for a
period of time and even have been known to loan their own money to
borrowers.
PMI is there only as long as you need it and is cancelable. A federal law
covering loans closed on or after July 29, 1999, includes two basic consumer
protections:
| Your lender must inform you at closing and annually about your right to
request PMI cancellation when your mortgage balance is 80 percent of the
original value of the house and explain how to do it.
| Your lender automatically will cancel PMI when the mortgage balance
reaches 78 percent of the home's original value. Even if your mortgage note
originated before July 29, 1999, PMI generally is cancelable once you have
built up enough equity and are up-to-date on your mortgage payments. The PMI
company does not make the decision to cancel insurance, and you should
contact the company you send your mortgage payment to for details on your
loan. More information about canceling PMI can be found at www.privatemi.com.
Brett Richards is with The Huntington
Mortgage Group and is a member of the Licking County Board of Realtors.
Contact Richards at (740) 587-7830 or e-mail at Brett.Richards@Huntington.com.
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