Combo Loans Versus Loans with Private Mortgage in Insurance ( PMI )

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Prior to the Tax Relief and Health Care Act of 2006,taxpayers were not allowed to deduct their mortgage insurance premiums on their taxes. However, since January 1, 2007, borrowers have been able to deduct mortgage payments. For folks buying their first homes, this sounds like great news. But is it? Let’s examine the issue further.

Combo loans are also called piggyback loans, and one major benefit to obtaining these types of loans was to take advantage of the tax deduction benefit that’s available for paying a chunk of interest versus paying mortgage insurance premiums that weren’t tax deductible on a single loan in past years.

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Another big positive in favor of combo loans is the fact that the sum of payments for a combo loan are usually a lot less than a payment with private mortgage insurance.

Combo Loans Versus Loans with Private Mortgage in Insurance ( PMI )

THE INNER WORKINGS OF COMBO LOANS

As can be discerned from its name, combo or piggyback loans involve funding that combines a first and second mortgage – and may involve a down payment, but not always.

The combo loan becomes attractive to buyers who don’t have 20% of the purchase price of the property available in cash – or don’t want to put a 20% down payment on a home they are seeking to purchase.

Also, these loans help get around the PMI payment requirements.

COMMON TYPES OF COMBO LOANS

THE 5/15/80 COMBO LOAN

The 5/15/80 combo loan means you’ll put down a 5% down payment and finance the first mortgage for 80% of the purchase price. The second mortgage, meanwhile, is comprised of 15% of the purchase price.

THE 10/10/80 COMBO LOAN

The 10/10/80 combo loan means home buyers must put down a 10% down payment and then have their first mortgage financed at 80% of the purchase price. The second mortgage is then made up of the remaining 10% of the residence’s purchase price.

THE 80/20 COMBO LOAN

Unlike the other scenarios described above, the 80/20 combo loan means you would put down a $0 down payment and have the first mortgage financed at 80% of the purchase price. A second mortgage would be combined with the first, representing 20% of the purchase price of the property.

While the second mortgage’s interest rates are higher than those on a first mortgage, sometimes the total payments are less than the ones that have been financed on a first mortgage with PMI. Also, because combo loans peaked out in 2005, a large amount of home buyers end up considering other options due to the fluctuations of short-term interest rates.

PMI VERSUS COMBO LOANS

In order to get a real life feel for PMI loans versus combo loans, let’s pretend that there are two different families that both enjoy FICO scores of 680.

Here is how the payment amounts would shake down:

THE 80/20 FINANCING FAMILY

Family #1 chooses to buy a $500,000 home using the 80/20 financing option. Their first mortgage would come with a 6.25% interest rate, which means they’d pay $2,462.87 per month for both principal and interest payments. The family’s second mortgage, however, at a 8.5% interest rate means they’d pay $768.91 per month in principal and interest payments.

Therefore, the total payments for the Family #1 combo loan would equal $3,231.78, or the sum of those two mortgage payments.

THE 100% WITH PMI FINANCING FAMILY

Family #2 also buys a $500,000 home – but they use 100% financing with PMI insurance as a funding option. Their first mortgage also comes with a 6.25% interest rate, but their payments on the first mortgage are $3,079. The PMI insurance would add an additional $400 to that payment.

Because of those calculations, Family #2 combo loan’s total payments for their 100% first mortgage with PMI would equal $3,479, more than $200 in monthly payments than the first family’s payments.
In order to get rid of that PMI payment, this second family would have to wait two years, and get an appraisal to show they have 20% equity. If they do so and their monthly payments are reduced to $3,079 without PMI, the second family won’t pay less than the first family until month 63 of the loan.

INCOME TAX PROVISIONS FOR MORTGAGE INSURANCE PREMIUMS AND PMI

MMI is shorthand for Mortgage Insurance premiums, amounts that are paid on FHA and Rural Housing Loans. Certain conventional loans require PMI.
Both MMI and PMI are tax deductible under some conditions. If you’ve taken out a mortgage loan after December 31, 2006, the Tax Relief and Health Care Act provision for PMI tax deductions says you can claim PMI as a deduction on your taxes.

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See the IRS’s website for all the latest requirements for claiming your PMI deduction, because the privilege is available to people filing joint or single tax returns whose adjust gross income (AGI) meets certain income levels.

Many taxpayers find they should earn at least $50,000 annually in order to make itemizing their taxes a better deal than taking the standard deduction, so this narrows the field even further when considering the fact that households earning above a certain AGI can’t take a deduction.

In the end, the mortgage insurance tax deduction can greatly benefit taxpayers, because all provisions like these can help home buyers who qualify for the deduction to reduce the amount of taxes they owe – and isn’t that a good thing? Also, helping people buy their first homes is a great benefit.

Tag : Loans , Combo loans , Mortgage loans

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Combo Loans Versus Loans with Private Mortgage in Insurance ( PMI )
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