Milwaukee Condo & Real Estate Scene

Buyers have another great reason to act in 2007

Reasons for owning your own home:

• Build equity by (1) holding onto your investment for the long-term and (2) paying down your loan principal balance

• For the long-run, as with any investment, your investment in your new home will appreciate in value; therefore, paying a steady rate of return on your investment

• Annual real estate taxes are fully deductible. Start reducing your income tax for 2007

• Mortgage interest payments are fully deductible for your primary residence. Make it your New Year’s resolution to reduce your income tax for 2007

In December 2006, President Bush signed a new tax law which will provide homeowners with another great reason for owning their home:

• Private Mortgage Insurance or PMI premiums are deductible for the 2007 tax year. Unlike the deduction allowed for real estate taxes and mortgage interest, this deduction does have its limitations – which I explain later in this posting.

First a history of PMI

What is PMI?

When you buy your home, lenders study your credit scores and other credit reports to determine your credit-worthiness or credit-risk. They also take into consideration how much you are willing to pay up-front as a down payment. To avoid paying additional premiums the general rule of thumb is to pay at least 20 percent of the purchase price as a down payment or obtain a piggyback loan (which has been very popular in the past few years). I will explain how buyers have been able to avoid paying PMI using this financial package.


How PMI works

Private Mortgage Insurance or PMI applies to buyers who finance their purchase and contribute less than 20 percent up-front as a down payment. You, the borrower, pay for the insurance policy and assign the lender as a beneficiary. In the unfortunate case where you fall behind on making your timely loan payment, the lender has the right to initiate foreclosure proceedings to recover from the lost payments. The mortgage insurance policy reimburses the lender for legal costs and lost income.


How buyers have recently avoided paying PMI

Many of my buyers in the past few years have avoided paying PMI with less than 20 percent down by obtaining a piggyback loan. Essentially, these buyers are obtaining two home loans: a primary loan for 80 percent of the purchase price and a second mortgage for the rest of the money needed. The second mortgage or piggyback loan has a higher rate than the first mortgage.


Why are two loans better than one with PMI?

The combined payments on a piggyback mortgage are less than the payment on a single loan with monthly insurance premiums. In addition to the lower combined payments, mortgage interest on both loans is tax deductible. Until now, mortgage insurance premiums were not tax deductible. Now that has changed with limitations (see below for explanation).


Benefits of PMI over piggyback

Private Mortgage Insurance or PMI can be canceled on loans more than two years old if the home’s value has appreciated enough for the owner to have more than 20 percent equity. Second mortgages or piggyback loans cannot be canceled. Piggyback borrowers can only terminate this loan by paying it off.


Should you choose PMI or piggyback?

It depends. If you plan on living in your new home for a short amount of time (2-3 years), then it might be beneficial to go with route that will provide smaller monthly payments (piggyback). If you plan on living in your new home for a longer period of time, then it might be beneficial to go with PMI as you will more likely see your equity grow beyond the 20 percent hurdle; therefore, PMI will cancel without additional expense.

As always, ask your lender to compare the total costs for piggyback and mortgage-insured loans over various timeframes to determine the most appropriate plan to cut down on your expenses.

If you need assistance with finding a lender, please call me at 414/412-7980 or e-mail at dray@shorewest.com.


Here’s how the new tax law reads:

• The new deduction applies only to mortgages that are closed in 2007. Unfortunately, for those who purchased their homes through me in 2006, you will not be able to benefit from this deduction (unless your refinance in 2007). Therefore, you must close on your new home in 2007 for this deduction to apply.

• The new law is for 2007 only. Congress will have to renew the deduction to make it apply for the 2008 tax year and beyond. Therefore, potential buyers, you must act in 2007 if you want to take advantage of this money-saving opportunity.

• Income Limits: Buyers get a full deduction if your Adjusted Gross Income (AGI) is $100,000 or less. The amount you can deduct phases out rapidly after the $100,000 threshold and no deduction is available if your AGI is at least $110,000.

• Finally, you must itemize for this deduction to affect your income tax calculation. If you find that the standard deduction provides you with a larger benefit, then this opportunity to claim this deduction is lost.

For more information about this recent tax change, please contact your lender or check out these other useful websites:

KLM Mortgage Group, Inc.
Wisconsin Mortgage Corporation

Labels: Tax

posted by David Ray @ 12:43 PM