Low-down-payment loans are becoming an increasingly important part of the mortgage finance landscape. According to a recent study published by the National Association of Realtors[R] (NAR), Chicago, from mid-2005 to mid-2006 nearly half of all first-time homebuyers put no money down; another 50 percent put down 10 percent or less. The median down payment made by first-time homebuyers was just 2 percent. [??] That's hardly surprising when you consider that over the past 10 years, nationwide, homes have appreciated 107 percent, according to data from the Office of Federal Housing Enterprise Oversight (OFHEO). During this same period, incomes have increased just 37 percent, according to Moody's Economy.com, West Chester, Pennsylvania. [??] At $221,000, the median home is out of reach for many first-time homebuyers, and even those who are in a position to carry a mortgage often can't save up a down payment of $44,000. The recent slowing rate of appreciation in many areas should allow the market to come back into balance, but that will take time. In the meantime, all of us in the mortgage industry are looking for creative ways to grow our businesses. [??] In my view, mortgage insurance (MI) should be thoroughly considered for every low-down-payment transaction, especially for low- and moderate-income borrowers and first-time home purchasers. It's tax-deductible, affordable and cancellable, and it can help expand your business. What I want to do in this article is dispel some myths about mortgage insurance, cover the nuts and bolts of how it works, and offer some ways to think about it that may help you expand your ability to serve the growing low-down-payment market.
Myths and realities
MYTH NO. 1:
Mortgage insurance isn't tax-deductible.
Many people believe this, because until quite recently it was true for borrower-paid mortgage insurance. (Lender-paid mortgage insurance, in contrast, has always been tax-deductible--and still is.) However, borrower-paid mortgage insurance premiums are tax-deductible for the first time in 2007.
Borrowers closing loans to purchase homes or refinance in 2007 who have annual household incomes of $100,000 or less will be able to deduct the full cost of their mortgage insurance premiums on their federal tax returns. Borrowers with incomes between $100,001 and $109,000 can take advantage of a partial deduction. (This is based on transactions closed in 2007, and MI premiums paid between Jan. 1 and Dec. 31, 2007, and allocable to 2007. Deductions are phased out in 10 percent increments for borrowers with adjusted gross incomes between $100,000 and $109,000.)
Bankrate.com, North Palm Beach, Florida, a source of consumer financial information, estimates that with the new tax deduction a homeowner with a $180,000 mortgage would save about $351 in taxes.
As with many new tax provisions, this is initially in effect for one year, meaning for premiums paid in 2007 on mortgage insurance certificates issued between Jan. 1 and Dec. 31, 2007. However, if the legislation has the desired effect of helping low- and moderate-income Americans overcome barriers to homeownership without having to resort to potentially higher-risk loans, I believe there's a good chance Congress will be persuaded to extend the deduction or even make it permanent.
MYTH NO. 2:
A piggyback loan is cheaper.
A few years ago, this was true in many cases. Today, piggybacks can be riskier. Interest rates on seconds are often adjustable and float with the prime rate, so piggyback loans are more expensive than they were a year ago and payments can jump significantly if interest rates increase. In contrast, mortgage insurance premiums are fixed, so borrowers don't have to worry about their payments going up. The bottom line is that in today's climate of slowing home-price appreciation and higher interest rates, an insured loan is a simple, safe and smart way for people to get into a home and start building equity. …