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Posted by M.D. on May 15, 2006, 3:54 pm
Please log in for more thread options Rainmaker - you mention that "There is NO chance that Congress/IRS will ever
allow mortgage insurance to be tax-deductable." Can you please explain why
so that I can understand? Thanks :-)
>
>> PMI industry fights back against piggyback loans
>> By Holden Lewis . Bankrate.com
>> The mortgage insurance industry wants to get the piggy off its
>> back.
>>
>> Two-tiered home loans called piggyback mortgages are stealing
>> the bacon from mortgage insurance companies. By one estimate, piggybacks
>> have taken 40 percent of the market share from mortgage insurers, whose
>> product is referred to as private mortgage insurance or PMI. Mortgage
>> insurers are fighting back in multiple ways: by pushing to make the
>> insurance tax-deductible, by developing a new product and by urging home
>> buyers to compare.
>>
>> Piggybacks and mortgage insurance are two common ways of
>> getting a home loan with a down payment of less than 20 percent. When a
>> buyer borrows more than 80 percent of the home's value, lenders deem that
>> loan riskier. Some lenders cushion themselves from that risk with
>> mortgage insurance, which reimburses the lender for costs associated with
>> foreclosure. The lender is the beneficiary of a mortgage insurance
>> policy, and the borrower pays the premiums.
>>
>> A handful of companies offer private mortgage insurance, which
>> usually is paid monthly as part of the regular mortgage payment. The
>> Federal Housing Administration, Veterans Administration and the Rural
>> Housing Service offer government mortgage insurance that involves an
>> upfront payment at the beginning of the loan, plus monthly payments.
>>
>> A few years ago, lenders began marketing piggyback mortgages
>> aggressively. A piggyback loan works this way: You get two home loans --
>> a primary mortgage for 80 percent of the purchase price, and a
>> higher-rate secondary mortgage (the piggyback loan) for the rest of the
>> borrowed amount. Piggybacks appeal to homeowners because the combined
>> monthly payments usually add up to less than the monthly payments on a
>> single loan with mortgage insurance.
>>
>> Comparing piggyback loans and mortgage insurance
>>
>> There are myriad ways to structure a piggyback loan. One
>> Georgia mortgage broker provides this comparison for a hypothetical home
>> buyer who has good credit and makes a 10 percent down payment on a
>> $250,000 home.
>> Mortgage plus additional piggyback loan Mortgage plus
>> private mortgage insurance (PMI)
>> Amount of primary mortgage $200,000 $225,000
>> Principal and interest on primary mortgage $1,136 (5.5
>> percent rate) $1,278 (5.5 percent rate)
>> Amount of piggyback mortgage $25,000 $0
>> Principal and interest on piggyback $164 (6.875 percent
>> rate) $0
>> Mortgage insurance premium $0 $97.50
>> Total cost per month $1,300 $1,375.50
>> The cost is initially lower on a piggyback loan, but the
>> private mortage insurance can be canceled once there is sufficient
>> equity. The break-even point between piggybacks and PMI depends on the
>> speed of home value appreciation, the homeowner's tax situation (PMI
>> isn't deductible, interest on piggyback loans is) and any additional
>> costs or fees associated with each product.
>>
>>
>> Having to pay closing costs for two loans erases some of the
>> advantage of piggybacks, but they still tend to be cheaper in the short
>> run. What about the long run? The answer differs for each homeowner's
>> situation because it depends on the interest rates, the pace of home
>> appreciation and the length of time the borrower plans to own the home.
>> Ask the mortgage lender or broker to give you a side-by-side comparison,
>> possibly with the help of a calculator on the Web site of the Mortgage
>> Insurance Companies of America, the industry's trade group.
>>
>> "People who live in the home for the long term, generally
>> speaking, are going to be better off with a single mortgage," says Jeff
>> Lubar, spokesman for MICA. "Remember, the mortgage insurance is going to
>> be cancelable at some point."
>>
>> To succeed in canceling mortgage insurance, your outstanding
>> loan balance has to be 78 percent or less of the home's appraised value.
>> That requires double-digit appreciation if you make a down payment of 10
>> percent or less -- a pace that might not be realistic over two or three
>> years.
>>
>> Even if you get mortgage insurance canceled promptly at the
>> two-year mark, it might take five to 10 years to recoup the cumulative
>> cost of the mortgage insurance. That's why a lot of borrowers get
>> piggybacks -- they know they won't own the house that long.
>>
>> The private mortgage insurance industry is responding to the
>> challenge of piggyback mortgages with more than just a plea for borrowers
>> to compare the numbers. One riposte is subtle: Mortgage insurance people
>> avoid using the word "piggyback," possibly because the word carries
>> carefree connotations of a gay childhood. Instead, they call piggybacks
>> "MI avoidance" or "split-structure" loans.
>>
>> PMI industry pitches alternatives
>>
>> MGIC, the largest mortgage insurance company, portrays the
>> piggyback loan as a mean, snorting pig in the company's marketing
>> materials for SingleFile, a product designed to kick piggybacks in the
>> snout. SingleFile's Web site sports a humorous parody of a political ad
>> in which piggyback loans are accused of voting against Christmas. (The
>> intended audience is mortgage lenders and brokers, not consumers.)
>>
>> With SingleFile, the borrower doesn't pay a monthly mortgage
>> insurance premium. Instead, the lender charges a higher interest rate --
>> a quarter-point to a half-point higher -- and the lender pays for
>> mortgage insurance. MGIC offers a comparison calculator. SingleFile is
>> less expensive than other types of mortgage insurance, because it is
>> offered only to low-risk borrowers who have excellent credit. The main
>> drawback is that you can't cancel it by getting the house reappraised. To
>> get rid of SingleFile, you have to refinance the mortgage.
>>
>> It's a good deal for people who can qualify, says Patrick
>> Sinks, executive vice president of field operations for MGIC.
>>
>> "The borrower only needs to have one loan rather than two
>> loans," Sinks says. "He has only one payment, has lower closing costs. By
>> virtue of the fact that the lender has him pay it as an interest rate,
>> that interest is tax deductible."
>>
>> PMI industry seeks tax break
>>
>> Tax-deductibility is an important issue with the industry.
>> Mortgage insurers tried but failed last year to persuade Congress to make
>> mortgage insurance tax deductible for families earning up to $100,000.
>> "It would level the playing field," Lubar says, because interest paid on
>> piggyback mortgages is deductible.
>>
>> The industry is trying again this year, with a bill introduced
>> in January by Sen. Gordon Smith, R-Ore. MICA estimates that about 12
>> million homeowners would save an average of $200 annually on their taxes
>> if the bill becomes law, a reduction of $2.4 billion in tax revenue.
>> Smith told his Senate colleagues that the law would make homeownership
>> affordable for 300,000 families a year.
>>
>> Even if the deductibility bill is shot down again, the
>> mortgage insurance industry will continue to swing a machete against
>> piggyback loans. "Piggybacks hog your equity," MICA's Lubar says, meaning
>> two things: You build equity slower with piggyback loans, and a piggyback
>> prevents you from getting a home equity loan or line of credit to pay for
>> home improvements or consolidate debts.
>>
>> Lubar notes that many piggyback second mortgages have variable
>> rates -- and they're likely to go up over the next few years. And he
>> points out that you have to pay closing costs if you eventually refinance
>> the first mortgage to get rid of the second, piggyback, loan.
>>
>> Because borrowers, too, eventually want to get the piggy off
>> their backs.
>>
>>
>> (Source: By Holden Lewis . Bankrate.com -
>> http://www.bankrate.com/brm/news/mortgages/20050303a1.asp )
>>
> There is NO chance that Congress/IRS will ever allow mortgage insurance to
> be tax-deductable. Rather, in every session of Congress the mortgage
> interest deductability issue is discussed. Someday we may loose that (a
> la Canada), though the NAR continues to lobby to preserve it.
>
> The new trend is lender paid MI (LPMI). It is reflected in the interest
> rate which, for now, is tax advantaged.
>
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