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Housing market has new incentive
Robin Wilson, Baird & Warner
Not only is there a glut of houses on the market, and not only are interest
rates still low, but the government is offering new encouragement for
certain buyers: a tax deduction for private mortgage insurance (PMI) for
qualified home buyers who make a purchase in 2007. This is at present a
this-year-only provision, passed late last year, but could be extended.
Private mortgage insurance is something mortgage lenders require
borrowers to buy when the down payment on a purchase is less than 20
percent of the purchase price or appraised value, whichever is lower. It
protects the lender from loan defaults. Typically PMI will cost you 0.3-0.9
percent of the loan each year. The traditional upside to PMI is that a buyer
is able to purchase a home with a small down payment, say 0-15 percent.
Many younger or first-time buyers don’t want to wait to accumulate the
traditional 20 percent down.
An alternative to a loan requiring PMI would be an ”80/10/10” loan,
whereby a borrower actually gets two loans, one at 80 percent of the
purchase price and a second at 10 percent. The second, smaller loan is
known as a “piggyback,” and normally carries a higher interest rate than the
primary loan. The remainder of the equation is a 10 percent downpayment.
Compare these example loans for a borrower with a credit score of 680.
• Combo loan: Based on recent rates, if you buy a $500,000 home using
80/10/10 financing, the first mortgage would be at 6.25% and cost
$2,462.87 per month principal and interest. The second mortgage
would be at 8.5% and cost $768.91 per month. Your total monthly
payment for a combo loan: $3,232.
• 100 percent financing with PMI: If you buy the same house with
nothing down and PMI insurance, the first mortgage would still be at
6.25% but payable at $3,079, and PMI insurance adds another $400
per month. Your total monthly payment: $3,479. However, that $400 is
tax deductible if the is loan closed in 2007.
To get rid of the PMI insurance requirement, you could wait two years and
then obtain an appraisal to show that your equity has grown to at least 20
percent. If you do, your monthly payment drops to $3,079 and in month
63 of the loan, you will reach the point where you will have paid less than
if you had piggy backed.
In the past, the advantage of having two loans was that you could
deduct interest on both of them. Paying PMI was throwing money out the
window. Now the tide has turned, and buyers may have a net advantage
paying for PMI and taking it as a deduction as well. However, not everyone
qualifies. Here are the limitations:
• The tax deduction applies only to new or refinanced mortgages closed
in 2007.
• Your adjusted gross income cannot be more than $100,000.
• You must itemize deductions. If your mortgage is less than about
$130,000, you won’t pay enough interest to match the standard
deduction.
Banking experts anticipate that about one million Americans who buy a
home this year will benefit from this provision. But what does it mean to
you? According to the 2000 Census, the median household income in
Highland Park is $100,967, so many current Highland Park families would
not qualify under the salary cap. But certainly, many of the children and
grandchildren of local family could benefit when entering the housing
market for the first time.
As with any home purchase, you should make sure you have a good
lender working on your behalf. Carefully consider the recommendations
you receive. Take a serious look at mortgage insurance as well as the
alternative piggyback loan option. Piggyback loans often have a much
higher interest rates than the primary loan, and if you’re putting down less
than 20 percent, you still may be better off in the long run paying for
mortgage insurance.
For more information on real estate market facts in your
area, or for advice on building a real estate portfolio, contact
Robin Wilson at Baird & Warner, 847-266-4757, or visit
www.wilsonliving.com.
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Summer 2007 / 43