Pros and Cons of PMI Tax Deduction
Only buyers can decide PMI deduction's value, says Bills.com's Stroh
SAN MATEO, Calif., Feb. 7, 2007 - Who says Congress doesn't care about the average American? At the 11th hour during the last Congress, elected leaders gave Americans a contribution toward home ownership, making private mortgage insurance (PMI) tax deductible starting in 2007. "This changes the home mortgage landscape," said Stroh. "Previously, mortgage lenders have steered buyers toward 'piggyback' loans to save the cost of PMI. Now some home owners can save more money with a single mortgage insured by tax-deductible PMI." Over the past decade or two, as home prices have escalated in most U.S. neighborhoods, fewer home buyers make the "traditional" 20 percent down payment. Instead, home buyers face a slew of options: first-time buyer programs and variable down-payment programs secured by PMI, or 80/20 or 80/10/10 "piggyback" loans that give the first mortgage the effect of a 20 percent down payment. "All of these are valid means of financing a home," Stroh added. "Which one is right for any given buyer depends on several factors: How long the buyer plans to stay in a home, the mortgage amount, the down payment or loan-to-value (LTV) on the current mortgage, and the buyer's credit score and tax bracket." In most cases, buyers will pay slightly more -- initially -- by paying PMI, Stroh said. But PMI has one significant advantage over a piggyback loan: Once 80 percent loan to value is reached, the home owner can cancel the PMI and stop paying the additional amount. Still, for some buyers, the flexibility of a piggyback loan will be right. Stroh suggested the following tips to choose between the two types of home loan packages. Pros and Cons of Private Mortgage Insurance (PMI) Pros:
- Only one loan means lower mortgage closing costs. A piggyback loan will result in some additional closing costs for the second loan.
- It is easier to make (and track) one mortgage payment than the two required with the piggyback.
- Once a loan is paid below 80 percent LTV, home owners generally can contact their lender to have the PMI payments eliminated (this may require an appraisal).
- PMI payments will likely result in a higher total monthly payment than a piggyback loan (at least until the PMI can be removed).
- Depending on individual factors (such as LTV and credit score), some PMI payments may be substantially higher than average.
Pros and Cons of Piggyback Loans
- Most piggyback loans likely will result in a lower total payment than a single loan with PMI (even after taking into account the tax deductibility of PMI payments).
- Home owners don’t need to remember to contact their lenders to have PMI removed.
- If a first mortgage is backed up with a home equity line of credit (HELOC) second mortgage, paying down the second mortgage makes an open line of credit available to the home owner. With the single loan that incorporates PMI, paying it down does not provide that same flexibility.
- Buyers must make and track two mortgage payments.
- The second loan involves additional closing costs.
- The higher interest rate on the second loan is with home buyers for the life of the loan (unless they refinance, which brings still more additional closing costs).
"Only you can decide which works best for your household -- but thanks to Congress, you now have more home-buying options," Stroh said. Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 10,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.