PMI Deduction Likely To Get Another Look
by Al Heavens
I got the impression at the recent National Association of Realtors convention that most folks believed that President Bush's re-election meant no change in the status quo. In other words, the real estate gravy train would not be derailed any time soon. There was some genuine concern that tax reform was again on the agenda in Washington. Whenever that happens, the real estate industry worries that someone might again propose eliminating the mortgage deduction. Because the administration is pro-housing and realizes full well that the housing industry kept the economy afloat for the better part of its first term in office, the fear that the deduction will be lost isn't all that real. When officials were asked how they felt about the failure of the proposal to make private mortgage insurance deductible as well, the response could have qualified as pretty much of a yawn. There has been a move afoot to make the monthly premium on private and government mortgage insurance deductible for individuals and families earning less than $100,000 to encourage homeownership among prospective low- and moderate-income buyers. The proposal, part of the omnibus tax bill approved by the U.S. Senate twice, was introduced in the House as the Mortgage Insurance Fairness Act in late September and cosponsored by 220 representatives from both parties. It didn't make it into the House omnibus tax bill, but with that level of support, Congress is likely to revisit the initiative next year. A lender typically requires a borrower to make a minimum down payment of 20 percent to qualify for a mortgage. If you can come up with only 10 percent, for example, the difference can be insured by a private mortgage insurer or the government, with the premium included as part of your payment. For a median-priced home -- nationally, that's about $181,000, according to the National Association of Realtors -- and depending on factors such as the amount of the down payment and the credit history of the borrower, the monthly insurance payment would range between $50 and $80. Many lenders allow the insurance to be canceled when the difference between the market value of your house and the amount you owe reaches 20 percent. Other requirements: The borrower must have a good credit history, and an appraisal must confirm that the borrower has at least 20 percent equity. An appraisal costs $250 to $300. In 1998, the Homeowners Protection Act became law. It requires that private mortgage insurance be canceled automatically when equity reaches 22 percent on mortgages obtained after July 29, 1999. If a lender has not acted within 45 days, it has to start refunding the insurance payments to the borrower. Your lender is required to inform you at closing and annually about your right to request cancellation and how to do it. According to the law, the automatic cancellation date is defined as the date when the loan is scheduled to be reduced to "78 percent of the original value of the property securing the loan." That you can figure by looking at the amortization schedule supplied annually by the lender. The law does not apply to high-risk mortgages for which these payments can last as long as 15 years (usually the midpoint of a 30-year fixed-rate mortgage) or to FHA and Veterans Administration loans. The law also does not cover piggyback loans, which include a second mortgage to cover part of the down payment instead of mortgage insurance. Payments on the second loan cannot be canceled and must be paid in full. The insurance on FHA mortgages, called a mortgage insurance premium, comes from the U.S. Department of Housing and Urban Development and is typically lower than that on conventional mortgages. HUD has its own cancellation policy, effective for loans from Jan. 1, 2001, on. How many years the premium must be carried depends on the size of the borrower's down payment. VA loans have no mortgage premium to cancel. They are guaranteed to the lender by the federal government, at no extra cost to the veteran. The best way to get out of an FHA mortgage insurance payment is to refinance to a conventional mortgage. Make sure, however, that you are not sacrificing lower overall payments simply to get rid of the insurance. As for conventional borrowers who request private mortgage insurance cancellation at 20 percent, the law requires them to show proof that the property's value has not declined. The law defines original value of the property as the purchase price or the appraised value at the time of purchase, whichever is less. | 
