PMI (private mortgage insurance) became a tax deductible expense for all new borrowers who earn below the $100,000 threshold, from on January 1st, 2007. The main advantage of this new legislation is that it will assist those homebuyers who were choosing the more risk prone ‘piggy-back’ kind of loan, thus avoiding PMI for the last few years.
But what exactly is this PMI and what does it entail? Basically, in a traditional mortgage, the borrower is obligated to place a twenty percent down payment which is based on the selling price of the house. PMI is levied if the buyer doesn’t fulfil the full twenty percent down payment required. This fee has to be paid on a monthly basis by the buyer as means of protection for the lender in the unfortunate event of foreclosure. The buyer will continue to pay the PMI until enough equity accrues so that there is twenty percent ownership of the house.
In recent times, in an attempt at avoiding the payment of PMI, quite a few buyers utilized a secondary loan or a ‘piggy-back’ loan so they would be able to pay their down payment. In this situation, the second loan is often comparable to a home equity loan and will have either an adjustable interest rate or a balloon type payment which will come into effect within three to five years.
A lot of people wonder what the best option is - a PMI or a ‘piggy-back’ type of loan? This all depends on the particular situation you may find yourself in at the time. With the PMI deductible legislation now in place, this option is definitely worth thinking about again. If your house happens to appreciate, or you are in a position to add some ‘sweat equity’ to augment the accrued equity of the house up to the twenty percent limit of the assessed value, the PMI, in most cases, will be negated. Conversely, if you have taken out a second loan, then you will have to continue making the payments until the loan has been paid in its entirety.
Your best option would be to discuss all the alternatives with your mortgage officer or realtor. By having a trusted advisor clarify all facets of the various loan products available, will assist you in selecting the best mortgage for your personal situation.
