MaGIC Real Estate Market in 2007? (Article written for Advisor Source Newspapers)
This year Uncle Sam left something under the Christmas tree for everyone. Whether you own a home, know someone who owns a home, want to own a home, or you are involved in real estate as a profession, this gift is truly magical. The magic is a new tax deduction in real estate that may give a much needed “shot in the arm” to areas with sluggish real estate sales.
The 109th Congress passed a law in its final hours of 2006 that is estimated to help almost a million homeowners this year. Like him or not, President George Bush signed the bill making it law. So, what is the magic? For so many people that make mortgage payments on real estate, their money will now magically reappear. What you are about to read, may not apply to you, BUT READ ON, the underlying affects will benefit you.
Effective for tax year 2007, anyone who purchases a home with a mortgage or refinances their current home with less than 20% down payment or equity, respectively, will be able to deduct the cost of their monthly PMI, a common abbreviation for “private mortgage insurance”. MGIC a/k/a MaGIC to industry professionals is the Mortgage Guaranty Insurance Corporation. MGIC is America’s most prominent insurer of mortgages. In most cases, saving for a down payment of today’s high priced housing is very difficult, yet the benefits of home ownership are attractive enough that consumers pay the high price of PMI on top of their house payment. Those payments are typically $50 to $200 per month or $600 to $2400 per year. Now these payments will be tax deductible. Tax brackets will vary, but the approximate savings in Federal taxes could be anywhere between $200 and $1000, or more. Because the law only applies to new loans taken out after January 1, 2007, those that currently pay PMI will not be able to deduct it. BUT READ ON, you still may benefit.
When buy or refinance real estate with less than 20% down or equity position, the lender considers the loan a higher risk. They pass that risk on to you and there are basically two ways to pay for it: private mortgage insurance (PMI) or a piggy back loan. PMI is considered the old way until this tax change. You pay for the insurance and the lender is the beneficiary. If you fail to make the payments and the lender forecloses, they are reimbursed for legal fees and lost income. The PMI goes away once you reach a 20% equity position. The premium depends on the size of the loan, percentage of down payment/equity, credit score, and type of mortgage insurance. MGIC is not the only one (there is private, public, FHA, VA, and Rural Housing Service) The new way is the piggyback loan. A piggyback loan is the illusion of equity; forgive the pun to magic again! A borrower will get a first mortgage for 80% and a second mortgage for 20%. Typically the interest on the second mortgage is higher or a variable rate, interest only payment, and a shorter term. Also, many can get one large mortgage for up to 100% of the real estate’s value. In both scenarios, the interest rates are slightly higher because the lender absorbs the risk or pays the PMI through the higher rate. The benefit is to avoid the PMI which is considered “money out the window”. For years this has been considered a better way because the interest is tax-deductible. However, those higher rates or loans don’t “go away” as quickly, typically. But all that has changed. You can have your cake and eat it to, with some warnings:
- There are income limits. The full deduction only applies if your adjusted gross income is less than $100,000.
- This could be a one year deal. This rule only applies to 2007 and Congress would have to renew it for 2008.
- If you take the standard deduction instead of itemizing, this new law may not be for you. Typically interest on mortgages of $125,000 and above will make itemizing the way to go.
According to Mike Zimmerman, VP of Investor Relations for MGIC, “Now everything is on an equal footing. Mortgage insurance is tax-deductible and piggyback is tax-deductible."
Mr. Zimmerman says that in many cases, monthly payments on a loan with mortgage insurance will cost more than piggybacks, even after the tax deduction is taken into account. That makes them more expensive in the short run. But private mortgage insurance can be canceled on loans more than two years old if the home's value has appreciated enough for the owner to have more than 20 percent equity and/or paid down. In contrast, you can't cancel a piggyback loan. You pay it until it's paid off.
As promised, even if you don’t plan to buy a home, or even a home, you know someone that does or will. The new rule takes the stigma away from PMI and will make housing more affordable and easier for more Americans. More money in homeowners’ pockets, more alternatives in financing, and new benefits all boost the real estate market. The hope is of more sales and stable to appreciating values. When that happens, that is good for everyone. No matter where you exist in the economic food chain, a good real estate market is critical for all.
(Al Block and RE/MAX First do not offer tax advice. Please seek counsel from a taxation specialist.)
Al Block, of RE/MAX First, Inc. is a designated Senior Real Estate Specialist.
He is a licensed Realtor®, Appraiser, and lender actively practicing in southeast Michigan. To discuss any real estate topic, go to his website and click on “blog”.
Office: 1-800-SOLD-678
Web: www.alblock.com
Email: alblock@remax.net