Mortgage Insurance Regaining Popularity
This time next year, some of the homeowners who pay insurance on their home mortgage will have an extra deduction on their federal income tax returns.
A new law stipulates that certain borrowers who take out a home purchase loan or engaged in a mortgage refinance in 2007 are eligible to write off all or a portion of their mortgage insurance premiums for the year.
It’s a tax break many in the industry have sought for years because the insurance is often regarded as akin to mortgage interest or points.
Mortgage insurance is required for borrowers who put down less than a 20 payment down payment; its purpose is to protect lenders from losses - if the borrower defaults on the mortgage.
The insurance is then cancelled when there is enough equity built up in the home. But premium deductibility aside, mortgage insurance has been gaining in popularity these days, some in the industry say.
According to the Mortgage Insurance Companies of America, 118,214 borrowers used private mortgage insurance while buying or mortgage refinancing in February, an 8.5 percent increase compared with January’s 108,980.
In February 2006, 104,146 borrowers used PMI.
“The mortgage insurance industry has had a very, very good first quarter,” said David H. Katkov, president and COO of PMI Mortgage Insurance Co.
“People are looking at mortgage insurance today as they haven’t in previous years.”
Katkov calls the new tax break a “bonus” benefit to homeowners, adding that there have been other factors fueling the growth in the mortgage insurance industry.
In recent years, many borrowers have opted to get around the insurance by using the insurance by taking two loans: a primary mortgage as well as a second mortgage - a “piggyback” loan in the form of a home equity loan or line of credit.
The equity from the second mortgage loan fulfills the down payment of the first, and there are tax breaks on the interest of both loans.
But many piggyback mortgages have variable mortgage rates that fluctuate based on the prime rate, which has risen over the last year.
The set rate for home mortgage loan insurance has become more attractive to homeowners aiming for predictable home loan costs.
There’s also the simplicity that the mortgage insurance offers, since borrowers only need to deal with one set of mortgage loan documents in that option.
Tightened lending standards might also contribute to growing popularity of mortgage insurance; as home loan lenders get more conservative in the aftermath of problems in the subprime market, the risk associated with a piggyback loan probably isn’t as attractive, said Corey Carlisle, senior director for government affairs at the Mortgage Bankers Association.
The cost of the second mortgage, along with the hard look at underwriting standards, could have a “double whammy effect” on piggyback loans.
That said, piggyback loans are certainly not going away. For some borrowers, the dual loan structure might still make sense, he said, adding that “everyone needs to weigh their own financial needs separately and do what’s best for them.”
SOURCE: MarketWatch