New tax law tweaks home-buying math
Bush
signs legislation that makes PMI deductible for many homeowners.
By Les
Christie, CNNMoney.com staff writer
December 20 2006: 12:42 PM EST
NEW YORK (CNNMoney.com)
-- A $40 billion tax bill signed into law Wednesday by President Bush
extends several popular tax breaks and introduces a new one -
tax-deductibility of private mortgage insurance (PMI).
Only homeowners with
adjusted gross income less than $110,000 and who itemize their deductions
will be eligible to reap the benefit.
But for those buyers, it will change the math of buying a
house with a low or no down payment.
"I love it," says
mortgage broker Bob Moulton of Americana Mortgage Group, "Even though it's
limited in who can qualify, it helps people get into a home."
Most lenders require
buyers putting less than 20 percent down to purchase PMI because borrowers
are more likely to walk away from a mortgage when they have less of their
own money invested in the property. Lenders use PMI to protect themselves
against that risk.
The alternative to PMI
is an equity loan "piggybacked" on top of the first mortgage. According to
Moulton, extremely low interest rates on home equity loans (HELs) and
lines of credit (HELOCs) encouraged buyers to use piggybacks instead of
PMI the past several years.
In addition, equity loan
interest is tax deductible. With that advantage and the low rates,
piggybacks became far cheaper than PMI.
That situation has
reversed because equity loans are based on the prime rate, which has
climbed from about 4 percent to 8.25 percent.
Today, according to
Moulton, on a $225,000 home, the piggybacked portion of the loan would
cost about $4,000 a year while the PMI payment would come to about $3,000
- or less - depending on the borrower's credit score.
The tax deduction on the
equity loan would be about $1,600 for a borrower near the upper income
limit. With the new law, the PMI tax break would be about $1,200.
That means choosing PMI
would cost $1,800 compared with $2,400 for the piggyback loan, an $800
savings.
"It's tough to justify
going for a piggyback now," says Moulton.
