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Economic Insights

Mortgage-insurance tax status alters loan math

June 7th, 2007 9:01 PM

As of Jan. 1, private mortgage insurance is tax deductible. This is something worth mentioning in your next PMI article for your readers. Karl Holub, senior mortgage consultant, Accurate Finance, Buffalo Grove, Ill.

Answer: Sure is. Premiums not just on private mortgage insurance but also government insurance are tax deductible for the first time ever. But for now the write-off is good for the 2007 tax year only and not everybody is eligible. Still, that fact now requires borrowers to think a little harder about which loan is most beneficial.

Private mortgage insurance is required by lenders willing to allow borrowers to put up less than 20% of the purchase price or, in the case of owners wishing to refinance their properties, 20% of the home's appraised value. Actuarial studies have shown that the less skin borrowers have in the game, the more likely they are to default on their monthly house payments. But since it is so difficult and time consuming for most people to come up with enough money for a standard 20% down payment, lenders accept mortgage insurance as a substitute for the lack of cash.

The task of saving for a down payment is particularly tough on first-timers. Unlike repeat buyers, who often can avoid mortgage insurance by using some or all of the equity they've built up in their current residence to meet the 20% threshold, rookies have to scrimp and save every nickel they can get their hands on -- or borrow from friends and relatives.

According to Mortgage Insurance Companies of America, which represents six of the nation's seven private insurers, the typical buyer can purchase a house 10 years sooner by using mortgage insurance.

While the coverage protects lenders against the possibility that the borrower will not make payments as promised, it is the borrower who pays the freight, and it isn't cheap. The cost varies widely, depending on a number of factors: How large the cash down payment, the type of mortgage and the amount, or "depth," of coverage required by the lender. On a single-family home at the median price of $224,500, the cost of private insurance coverage ranges from $50 to $100 a month.

Often the fee is so expensive that lenders recommend taking out two loans, a primary mortgage at 80% of the purchase price and a second lien at a somewhat higher rate to cover the difference between the required 20% down payment and the amount of cash the borrower can put into the deal.

These so-called "piggy-back" loans can sometimes be cheaper than mortgages with insurance because interest on both loans is tax deductible. But they have their drawbacks, too. They require two closings, so settlement fees are higher. And they must be paid back in full. They cannot be canceled like mortgage insurance, which can be jettisoned when the difference between the outstanding loan amount and the current value of the property reaches a certain point.

Tax arithmetic

Of course, the best way to determine which product is best for your situation is to do the math. But this year, anyway, part of the equation involves the ability to write off a portion of your mortgage insurance premiums.

That may not be as great as it sounds, however. For one thing, it's not a dollar-for-dollar write-off. Like mortgage interest, it is a "below-the-line" deduction that is based on your tax bracket. So, if you are in the 31% bracket, your actual tax benefit is only 31 cents on every dollar of insurance premium.

For another, you can claim the write-off only if you file an itemized return. Most homeowners do, because the tax-deductible mortgage interest and property taxes they pay are usually greater than the standard deduction. But if the standard deduction is more beneficial, the MI deduction is useless.

And one more thing: The deduction is limited to borrowers with adjusted gross incomes of $109,000 or less. You will be eligible for the full deduction if your adjusted gross income is $100,000 or less. But for every $1,000 of income above the $100,000 threshold, your write-off for mortgage insurance will be reduced by 10%.

Despite all this, the average annual savings for taxpayers taking the mortgage interest write-off will be in the $300 to $350 range, according to MICA. Not a lot, but not pocket change, either.

There are a few other qualifications worth mentioning as well:

The write-off applies only to mortgages on a principal residence and one vacation property held for the personal use of the taxpayer for 14 days or 10% of the days it is rented, whichever is greater.

It applies to refinances up to the original loan amount. This could include first and second mortgages but not cash-out refinances. When refinancing a piggy-back loan, the original loan amount is considered the sum of the first and second mortgages.

It applies to move-up borrowers, not just first-timers. But investor loans are not eligible.

There is no loan limit. The only ceiling is on the taxpayer's income.

The deduction does not apply to lender-paid mortgage insurance in which the premiums are built into the interest cost of the loan. The cost of LPMI is already deductible as interest.

Finally, if you prepay a year's worth of premiums at closing, which is a popular option, or choose to finance the entire premium by rolling it into the loan amount, only the amounts allocable to the period between the closing date and the end of the 2007 tax year will be deductible. You can't write off the whole amount in one year.

At the same time, there is a chance that Congress could extend the write-off beyond the one-year trial period. The broad coalition of tax, consumer, civil rights and civic groups that persuaded lawmakers to give the deduction a shot are now busily at work seeking an extension, so deductions beyond 2007 are a possibility.

"Making mortgage insurance tax deductible will amount to real savings for people who need it most -- families who've worked hard to get into their first homes," says Peter Sepp of the National Taxpayers Union. "Our tax code has long recognized the importance of allowing costs associated with home financing to be tax deductible, and mortgage insurance should be no exception, Congress should uphold this principle by extending the federal tax deduction for mortgage insurance."

Posted by Heath Lefort - Personal Financial Advisor on June 7th, 2007 9:01 PMPost a Comment (0)

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Treasurys end lower; Bernanke predicts moderate growth

June 5th, 2007 10:33 PM

Treasurys end lower; Bernanke predicts moderate growth

Marketwatch - June 05, 2007 3:33 PM ET

NEW YORK (MarketWatch) -- Treasury prices closed lower Tuesday, pressing the benchmark yield within striking distance of the carefully watched 5% level, after Federal Reserve Chairman Ben Bernanke said he anticipates moderate growth ahead.

The Fed leader's words disappointed investors who hoped for some sign that the central banker is worried about economic weakness and that a rate cut remains a possibility.

On Tuesday Goldman Sachs became the latest financial institution to give up on its prediction for a rate cut any time soon. Also on Tuesday the futures markets nearly priced out any possibility of a cut this year.

"With rate cut hopes all but fading away like the western sunset, bond traders are vulnerable to any selling pressure that might arise," said Kevin Giddis, managing director of fixed income at Morgan Keegan.

The 10-year benchmark Treasury note finished down 11/32 at 96-10/32 with a yield $TNX of 4.974%, up from 4.927% at Monday's close. Earlier the benchmark yield traded as high as 4.921% Prices and yields move in opposite directions.

The 30-year long bond dropped 19/32 to 95-6/32 with a 5.065% yield.

The 2-year note fell 2/32 to 99-25/32 with a yield slightly above 5%, marking the first time that the 2-year note has broken above 5% since August.

The fixed-income market earlier in the year rallied on the view that a rate reduction was in the works, as the government would need to stimulate an economy slowed by a deteriorating housing sector.

However, in the second quarter a number of reports have painted a picture of the housing slump as serious but not having a contagion impact on the broader economy.

"On average, over coming quarters, we expect the economy to advance at a moderate pace, close to or slightly below the economy's trend rate of expansion," Bernanke said at a bankers' conference in Cape Town, South Africa. See full story.

Bernanke said some of the factors that slowed the economy to a crawl in the first quarter "seem likely to be at least partially reversed in the near term."

In addition, Benanke also again stressed the importance of fighting inflation, which suggested to analysts that price pressures also are too strong for the Fed to consider a rate cut.

Bernanke said that while there has been a "gradual ebbing" of core inflation, its level remains "somewhat elevated."

"However, although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside," he said. "In particular, the continuing high rate of resource utilization suggests that the level of final demand may still be high relative to the underlying productive capacity of the economy."

European Central Bank chief Jean-Claude Trichet and Bank of Tokyo Governor Toshihiko Fukui also are scheduled to appear at the conference.

Treasury prices were further pressured by the Institute for Supply Management's latest monthly services survey, which showed an unexpectedly strong performance in that sector.

The ISM May services sector headline reading came in at 59.7%, well above the 55.0% reading expected by analysts polled by MarketWatch.

The report's sub-indices showed improvements in new orders and prices, a further hint at inflationary pressure.

The services sector has been one of the stalwarts of the U.S. labor market, which has been beset with a deteriorating manufacturing sector.

The benchmark yield, which is used to set mortgage and corporate borrowing rates, in recent sessions has been hovering below the closely watched 5% level, as it sits in its strongest range in about nine months.

Although some analysts believe the 5% level does not hold great technical significance, that yield is rich enough to attract buyers and prove competition for stocks and other high-yielding assets. On Tuesday the rise in yields helped spark heavy selling in the stock markets.

Heath Lefort

Posted by Heath Lefort - Personal Financial Advisor on June 5th, 2007 10:33 PMPost a Comment (0)

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