Now, with the advent and continued growth of the interest only loan, the benefit has just swung in the taxpayer’s favor. But, is the trade-off worth the cost? Interest only loans mean to the average home owner that there mortgage debt will last longer, well past the number of years of a standard adjustable rate mortgage or fixed rate mortgage. Yes, the interest deduction is greater, but what is the cost of the missed opportunity to do something else with your money, 10 or 15 years from now? Will the tax benefit outweigh the financial cost of adding 10 or 15 years to the life of your mortgage?

Very few consumers are actually as tax savvy as they need to be, in the area of mortgage interest deduction and how to calculate actual savings. This means that very few consumers are actually aware of the real benefits and the real costs associated with their mortgage and their tax status. How can you determine the real benefit? It will require some effort on your part, in one of two ways: You can educate yourself about the tax and mortgage regulations, or you can seek the advice of a trusted financial advisor. The keyword here is trusted. You must take the time to establish a relationship with a financial advisor with whom you feel comfortable, and with whom you can communicate and trust.

The information that you provide to a financial advisor or tax analyst, will enable them to give you advice that fits your individual and unique situation. Every individual situation is different, and much of the tax benefit is dependent upon your individual income levels.

There is often a real seesaw in this relationship. In the early years, when your earnings are low, your tax benefit from mortgage interest paid is much greater. Then, as you age and your wage earning potential increases, your benefit from the mortgage interest deduction decreases. Unless of course, you can find a way to drastically reduce your adjusted gross income. Many individuals do this through the option of self-employment. This makes better use of your income dollars, and allows for a greater tax deduction on home mortgage interest.

The most important thing you can do for your financial health is to seek the advice of a trained professional, early in your adult life. Many decisions that you make during your twenties and early thirties will affect your financial health and your tax liability levels for 20 or 30 years to come. Your mortgage is one of those decisions.

Interest only loans, fixed rate mortgages, adjustable mortgages, or any of the other many options available to borrowers will have a different affect upon your individual situation. Many of these loans are structured to provide an imbalance of interest versus principal allotment of the payment total, during the first few years of the loan. The interest only loan is just that: all of your monthly payment is an interest payment on the principal. And yes, under the right conditions this is a truly great benefit when you file your income tax return; but the keyword is the “right” conditions. Otherwise, you’re not reaping the benefit you could possibly receive had you chosen a different loan option, or if your income levels were different.

I make no pretense that the American Tax System is a tangled web, and a maze of tax codes, laws, and regulations. But there is benefit to the mortgage interest and your tax liability, if you take the time to discover exactly what your options are, and how to best benefit from all the choices you have.

Mortgage lenders today, thanks to all the federal regulation, default rates, and identity theft in existence require more information than ever before. The mortgage application is sometimes a 10 to 15 page application that will ask questions pertaining to your life years prior. Why does the mortgage company want history? The lender simply needs previous addresses, previous jobs, and previous education to gain greater insight and opportunity to know the borrower. It is not entirely impossible to steal someone’s identity, gain access to their current information, even from three to five years prior. What is impossible is to enter the mind of the individual and gain access to relevant work history or education history.

Generally, when you complete a mortgage application there’s also a mortgage application fee charged at the time you submit the application; why do the mortgage lending institutions charge an application fee? Mortgage companies charge a fee because it cost money to process application, and only serious applicant’s warrant the time and expense.

What other information will be necessary to furnish when completing the mortgage application? Generally a personal financial statement, the proposed mortgage amount, and any legal judgments against you such as bankruptcies, tax liens, or federal student loans will be requested at the time of application submission.
Now, what have the mortgage products are available to the mortgage borrower? The most often used mortgage product is the fixed rate mortgage; the next in line would be the adjustable rate mortgage, and the newest member of mortgage products would be the interest only loan. The interest only loan is gaining in popularity at an ever increasing and phenomenal rate of growth. The fixed rate mortgage provides the borrower with a fixed interest rate for a specified number of years, generally 10, 15, or 20 years as a set onthly payment.

The adjustable rate mortgage is exactly as it sounds; the interest rate for this type of mortgage is adjusted at set intervals generally no less than six months no more than 12 and the amount of the monthly payment will vary according to the adjusted interest rate. The interest only loan is quite frankly, the least consumer friendly of the three and today the most popular of the three. When you take at an interest only loan, you may payment of only interest for a specified number of months or years on a loan that has been amortized for a greater number of years, usually 20, and at the end of the interest only term, your payments will reflect interest and principal payment. It’s at this juncture that many homeowners cannot afford the interest and principal payment. That’s why this mortgage product is the least consumer friendly; it does however make the most profitable lending institution.

I believe you should now have a much clearer picture as to what a mortgage is, why you complete a mortgage application, and the basic mortgage products available. If you are considering the purchase of a home, please take a moment to visit a local lending institution, a local realtor, and the web site of the Housing and Urban Development Department. You, as a potential homeowner can never obtain too much information.

What are other resources that can be accessed to learn about the mortgage process and your available options? Get online, check out the advertised lending companies there; look at the information they ask for, the products they offer, and then do some comparison shopping. Often, you will learn as much about what you don’t want, as what you do want.

Let’s start with the more intelligent options: home improvements and college educations. Home improvements are often a necessity after several years of occupying your home; when you actually live in a home, everyday use of the home encourages wear and tear. Carpet, appliances, even the paint on the wall begins to need repair. How do you pay for that require? Operating on a fixed income does not leave room for extra repair expense, so how does the average homeowner afford such an expense? Second mortgages are the most feasible option when repairs are needed or expansion is necessary. The interest deduction on a second mortgage if the mortgage is used to increase the value of the entire home, execute repairs within the home or increase the size of the home is a completely tax-deductible interest expense.

What about college education funding? Until recently, the most affordable option for college funding and financing was the second mortgage. Over the course of the last 10 years, private student loans, increased government funding, and the increase in the nontraditional student enrollment have led to a decrease in second mortgage options as a funding option for education. It has not however completely eliminated the second mortgage is a way to pay for college education; and today many parents still find this option the more attractive, affordable, and as a whole, the least expensive option for college education funding. After all, we are simply trading an equity investment in our home, for an investment in our child’s future.

Now, let’s take a moment to talk about some of the riskier options for taking out a second mortgage or home. Sometimes, we need to take the step into business ownership; sometimes we lack the funding to take that step. The equity we’ve managed to establish in our homes is an excellent source for that funding but is it the best option for the funding? Sometimes the answers you sometimes the answer is no; at any rate it is quite often the option most exercised by would-be entrepreneurs. My suggestion here is this: if you’re taking the money to open a business that is a continuation of your business background, a business in which you have extensive experience and knowledge, then I believe you’re making a wise investment. Otherwise, I would not risk the equity and savings in my home.

Well, we looked at some of the better choices for taking a second mortgage, and we looked at some of the riskier choices for taking out second mortgages, but what about some of the just plain nonsense reasons for taking out second mortgage? What are some of those reasons? New cars, expensive vacations, or plastic surgery in my opinion would fall under nonsense reasons. But not according to the average consumer. Everyday, new cars, vacations, and plastic surgery take place at the expense of home equity savings. Or they legitimate uses of home equity in second-mortgage funding? Absolutely. Are they tax-deductible reasons? Probably not; but nonetheless, consumers use second mortgage money every day to pay for these choices.

The reasons given and listed here are but a very small few of the actual examples of consumers spending of the equity in their home. A second mortgage was a tool intended to aid the consumer and provide access to the equity in their home, equity could be used to increase the value of their home or make worthwhile contributions to their family life. And as usual, some consumers actually use the second mortgage for this reason; many consumers, don’t. The second mortgage option has become like many other options in this day in time, a fast way to spend our selves into deeper debt management.

At some point, the consumer will become ready to retire, retire to a home without a home mortgage payment. The way to accomplish this end is to build equity in a home and payoff the mortgage. That’s one thing you can’t do with as a mortgage.
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For the average consumer, using second mortgage loan money to pay off credit card debt or to consolidate individual personal loans does not eliminate the possibility of a tax reduction; especially if that average consumer does not already own a second home. The only problem here seems to be that we’re replacing credit card debt for second mortgage debt; what do we then do with the credit card we’ve paid off? The smart consumer cuts them up.

How does a second mortgage affect your tax liability at the end of the year? A lot of that will depend on your income levels, your medical expense, and your other interest deductions. Mortgage interest expense is deductible on the Schedule A “Itemized Deductions” form of your individual or personal tax return. The Schedule A, however is not a straight tax reduction tool. Tax reductions, or deductions, carried forward from the Schedule A are a percentage of your AGI, or your adjusted gross income. Your adjusted gross income is based upon your income less certain expenses and deductions from Schedule Cs, Schedule Es etc. etc. Can you now see where this might be a little complicated?

Let’s throw something else into the mix: if you’re an investor, especially in the real estate market, your mortgage interest may not be deductible, period. Mortgage interest on your first home and on your second home is a tax deductible interest; if however, you happen to be an investor in the real estate market the ability to make it clear distinction between first and second homes versus investment property becomes much harder to prove. Is the home a second home with deductible mortgage interest expense, or is it an investment? Of course, for investors interest expense on a loan for investment purposes is fully tax deductible; no percentages to work with at all.

Now let’s ask another question, if you decide to take out a second mortgage could you better invest your money? What a 401(k), an IRA, or an MSA be a better benefit when it comes tax time versus leading the money in your home as equity? This has been a question long debated by financial analysts, tax attorneys, and fairly tax proficient homeowners. How does the equity better serve the homeowner? As a savings account, which is really what the equity in your home turns out be, or as an investment tool that can be used to increase your retirement savings? There are other factors to be considered here: such as penalties for early withdrawal, risk ratio versus profitability ratios, and which programs reduce tax on a one-to-one ratio? Unless you already have some general knowledge of the tax system, it can be more expensive to determine tax savings than you would actually save.

As you can see there are many, many ways to affect your tax liability, your tax deductions, or affect a tax reduction; the correct answers are highly dependent upon the individual situation and the individual objectives. The only way to accurately determine the better benefit is to sit down with a financial advisor, your tax information, and evaluate your long-term objectives.

Does the average consumer ever take the time to accomplish this? As a general rule the answer is no. Most consumers never take the time to look past next month. Over the course of a stressful and busy work week retirement planning, tax deductions, and income producing benefits never cross the consumer’s mind. For those individuals who truly anticipate and receive benefit from tax planning in relation to their mortgage interest, there are many more individuals who never even contemplate that there might be a savings. Maybe, we should just skip this question.

Have you stopped to examine the purpose of the interest only loan and what purpose it will serve in your particular situation? The original intent of the interest only mortgage was to make home ownership more appealing to young couple; not every prospective buyer, however, is a young person looking to buy home. Careful evaluation of your situation and the interest only mortgage must be performed in order to secure the best mortgage possible.

Let’s take a look at the original intent of the interest only mortgage, and the greatest benefactor in the interest only mortgage segment: the short term homeowner. The idea behind the interest only mortgage product was to give the short-term homeowner a race in the buy home, with or down payment requirements associated with the standard mortgage. This idea worked so well, that now almost every kind of homeowner is exercising their interest only mortgage option. As it was only ever really intended to benefit the short term homeowner, the interest only mortgage product is currently used as a means to buy “more home for less money”.

The appeal to the short term homeowner segment of the market was a way to grow the housing industry, since this particular type of buyer, normally only rented. In most short-term home ownership, situations, the buyers are young professionals in the beginning years of their career, who have tremendous potential, and almost always a guarantee of purchase from their company should their home remain unsold after one year on the open market. As you can see, the consumer who was initially targeted for this type of loan would truly see a benefit from the interest only mortgage product. Today, however, the consumer actually applying for the interest only mortgage product is a consumer who seems to be spending beyond their income means.

What we have discovered, with today’s consumer there is an overwhelming tendency to purchase more home than can possibly be afforded; the reasoning behind such a purchase? Since the term of the interest only segment of the loan will normally run three to five years, many homeowners are borrowing based on “anticipated earnings”. Quite often, the anticipated earnings never materialize, and at the end of a five year interest only term, the homeowner is left with a much higher mortgage payment minus the increased earnings.

As with many other modern-day products packaged and sold to the consumer, it sometimes is not always the wisest choice, the best buy, or the greatest benefit to simply follow suit; sometimes, educating yourself as a consumer is a much better, and a much more affordable choice.

The long-term, homeowner purchasing to procure a safe haven from which he or she can retire and be assured of a decent home, is not a benefactor, nor suggested candidate for the interest only mortgage product; however, in the attempt to grow this product into a larger share of the mortgage market, many interest only loans have been advertised as ways to pay off credit card debt, avoid a down payment, and create greater tax savings at the end of the year. None of these reasons, within itself would be a “good” reason to purchase an interest only mortgage product.

Many of the local lending institutions, especially the banking industry, have shied away from the open arms welcome that the interest only product received in the mortgage company circle, simply because the loans are a riskier prospect, and many times consumers aren’t as educated about the choices they are making. When you misuse a product, you begin to run into problems, and create a potentially dangerous market situation.

How do you even qualify for a second mortgage, what is a second mortgage, and why would you want a second mortgage? Well, the answers here are as varied as the consumers who apply for such mortgages. Many times consumers need a second mortgage to make improvements on their home. Many times consumers need a second mortgage to put their child to college. And sometimes, consumers need a second mortgage to start a business. The reasons given here for obtaining a second mortgage increase the value of the home, provide opportunity as an investment in your child’s future, or provide the opportunity to increase income. These are the original and most beneficial reasons for obtaining a second mortgage.

Are they the only reasons consumers obtain second mortgages? No. Today’s market has been a great influx of second mortgages to pay off credit card debt, to buy new car, or to simply take a vacation. Should consumers receive a second mortgage for those reasons? Absolutely. Should consumers actually ask for a second mortgage for those reasons? Absolutely not.

An educated consumer understands the consequence of a second mortgage. The educated consumer understands the price of the second mortgage. What is the price of the second mortgage? The equity in your home. When you apply for a second mortgage, you’re trading the equity in your home for cash. You’re giving up your savings.

If you’re trading your savings, in order take a step up, you’ve made the right decision. If you’re trading your savings for a frivolous expense, you’ve made the wrong decision. That’s how you determine if your second mortgage is your friend or your foe.

Today’s consumer is acquiring second mortgages that for many will prove to be their foe. They’re not increasing the value of the home; they’re not educating their children. Nor are they increasing their income earning potential, they’re simply spending their savings. Rising real estate prices, increasing availability of mortgage products, and the decline of savings for the public as a whole is creating the “bubble” effect. The bubble effect occurs when prices rise, spending rises, at a rate greater than can be supported on a long-term basis. At some point, the bubble bursts.

Your second mortgage, if used to increase the value of your home, will have insulated you against the drop in price. Your home is actually worth more; therefore, if prices drop you’re protected. This was the original intent of the second mortgage; to provide the consumer with easy access to the savings accumulated in their home for home improvements, emergency events, or in order to better their homes or lives. You know for the most part consumers do not save money in a savings account; consumers only save money when they aren’t aware that they’re saving money. Home equity was one of the last hidden ways consumers were saving. Second mortgages and other loan mortgage products have managed to eliminate those savings as well. Has the consumer stop to contemplate the consequence of negative saving? Absolutely not, and our current system of mortgage lending encourages negative savings.

Second mortgages are a great way to access your savings and increase your income tax deductions; they are one of the greatest tools available for financial planning and beneficial consumer spending. They are also the fastest way to spend yourself in to debt under socially acceptable circumstances. Many consumers receive offers for credit card debt consolidation and financial analysis. There are never any offers to counsel the consumer concerning their choice in mortgage products, the option of second mortgages, or the consequence of those choices. Your decision to and a second mortgage can be one of the best decisions you’ve ever made or your decision can be one based on folly and frivolous spending. Now, your second mortgage, is it your friend or your foe?

As many individuals reach retirement age, their fixed incomes simply aren’t adequate. They aren’t receiving enough through social security or a pension fund to take care of the rising costs of living and the medical attention many older citizens must have. So what is the solution? Many of these retirement age citizens have children. Why can’t their children supplement their incomes, or simply take care of their elder care needs? The simple fact is that many of their children aren’t in a position to care for their elderly parents. Their incomes aren’t enough to have money left over, and if both spouses work, there is no one to take care of an aging parent.

It is at this juncture that many people have begun to turn to the reverse mortgage in seeking the increase in monthly income that is so desperately needed. The reverse mortgage offers older citizens a way to benefit from the equity in their home, because the reverse mortgage turns that equity into a monthly income. Quite frankly, unless you live with your parents, or you intend to move into your parents home when your parents pass, you aren’t going to retain the home; statistics attest to the fact that the vast majority of children sell their parents home, once their parents are no longer in need. Why not cash in on that equity when your parents are alive, and need the monthly income?

The popularity of the reverse mortgage has been steadily increasing, and many reverse mortgage companies expect 2005 to be a banner year. As the idea begins to catch, and spread among the elderly, there are more mortgage companies that offer a reverse mortgage product. The key here is that most of these elderly did plan for retirement; they did try to make the necessary adjustments so that there monthly incomes would be enough to see them through their retirement years. Thanks, however, to the rising cost of medical care, prescription medicine, and heating fuel, many older citizens have found that their planned retirement income each month is simply not enough.

There are those reaching the retirement years, for which the reverse mortgage is not an option, simply because they have no equity in their homes, or they don’t own a home; but for the remaining seniors, it’s an option that I would exercise, especially if I were certain my home would be sold during an estate or inheritance sale. The money that the reverse mortgage generates, can add so much to the few years we have during our retirement in the areas of travel, entertainment, and sheer enjoyment of life.

Since we can never be sure that we’ve properly prepared for retirement, or that some unexpected emergency won’t knock us off our feet, or that we simply do not have enough thanks to the stock market losses of recent years, the reverse mortgage is one of the best ways for older citizens to access the equity in their homes and turn it into ready cash.

We have saved the best part, however for last: any proceeds from the reverse mortgage are tax-exempt proceeds. In other words, you will not have to pay tax on the money. There are other, tax-exempt options, but the reverse mortgage remains one of the most conducive to the senior citizens needs, as well as those of their families. The interest payments on a reverse mortgage are deferred until death, therefore, seniors do not have to be concerned with making interest payments or tax payments on the proceeds.

If you’re not familiar with the reverse mortgage, and you think you might benefit, or that your parents might benefit, take a moment to seek the advice of a financial officer, and then quite possibly your attorney. Never make any decision before you fully understand what the consequences of your decision might be, legal or otherwise.

Especially now during this period of extremely low interest rates, your home’s cash equity could be earning you a return of 18-20% in certain investment funds. Even if you borrow money in order to cash out the equity, you’re making money. The interest you pay is substantially less than the interest you’re earning.
Why are we so reluctant to take out a second line of credit, or increase our mortgage balance through refinancing? Many of today’s homeowners reaching retirement age do not fully understand all their investment options, nor do they understand how investments like growth funds work. They are very reluctant to try anything that is beyond the sure bet of a certificate of deposit. In so doing, they are missing a tremendous opportunity to earn a greater return on their money, and let their money work for them.

Take a look at your 401k, where are your investments? Are they earning 5-8-10%? Unless you’re ready to retire, your 401k should earn at least 6-8% on your investment. Your home is earning you nothing on your investment, at least, not in the sense that the money must stay in the home in order for the home to increase in value. Quite honestly, your home will appreciate in value if you do nothing but maintenance work and live in it. Your equity you have in your home, can earn you up to a 15% return, while you still are fairly safe with your principal investment.

Speaking of 401k investments, are you investing the maximum each year in your 401k? If you’re self-employed, are you making use of the SEP retirement options that reduce your tax liability? If you’re not, you should really consider the equity in your home as an investment option for adding to your 401k, or establishing an SEP that will allow you to invest your money in profitable and fairly safe global and growth funds. There are still many excellent opportunities in the stock market. There are segments of the market that are experiencing phenomenal and stable growth. The overseas markets, the domestic real estate markets, and the energy markets are growing, and are expected to see sustained growth. Put your money to work for you, especially if you are several years away from retirement.

Another retirement option that involves a mortgage loan is the reverse mortgage. This however, is not a way to build retirement savings; it is a way to simply access the equity you’ve built in your home, so that your monthly income levels are adequate to sustain your most vital needs. Food, clothing, heat, and medicines are a must as you reach or near retirement age. Many times, the elderly are not as prepared financially as they anticipated that they would be. How can they supplement their monthly incomes? The reverse mortgage is the answer to many older citizens’ financial needs. The reverse mortgage allows a person to withdraw a monthly sum against the equity they’ve built into their home. The interest payments are deferred until death, and the homeowner doesn’t have to worry about making a monthly payment, or borrowing money. They are able to use the money they’ve already put into their home, just when they need it most.

If you are past the age of 40, and you haven’t taken the time to consult with a financial analyst, I would recommend that you seek out one that you can trust and that you are comfortable in discussing your financial affairs with, and begin to look at your retirement options, your retirement needs, and your ability to meet those needs, based on your current income and savings. What you may find is that you aren’t near as prepared for retirement as you thought. The monthly income needed will probably greatly exceed your anticipations. But, if you own your home, you may have just prepared more than you think!

You have analysts that will argue for either side. But, you need to have a better understanding of how this process works, and what elements have come together to allow this kind of growth, before you can accept or disprove either argument. What has happened to spur this kind of growth? Well, there are several key factors that managed to come together at precisely the right time, some of them attributable to natural disaster that has generated a booming market.

The first contributor was the falling interest rate that has leveled out around 6 – 7%; the second great contributor has been the increase in mortgage loan options. There are mortgage products out there to fit every type of buyer. The third contributor, (and this one is purely from nature) was the horrific hurricane seasons of the past couple of years, including the season we had this year.

How have all these elements come together to generate growth? Here’s exactly how: lower interest rates meant cheaper monthly payments, refinancing options were open, and people could afford to buy bigger homes for less. Add to that mix a more varied loan market, and you have an increase in buying, selling, and building. If you also throw in the fact that hurricanes destroyed massive quantities of homes along the coast, and most will rebuild, you have a burgeoning real estate and housing growth market.

We have also managed to create an environment very conducive to investment, construction, and resort development. Now, if you factor in a booming market for investors, you have a prime situation for increases in real estate value, increases in construction, and increases in mortgage loans.

How does the average citizen ready to buy or build a home interpret all this information? Well, it creates a wonderful situation for the homeowner looking to sell a home, simply because the value of the home should show a tremendous increase over the purchase value, especially if you’ve owned the home for more than 10 years. However, if you’re buying or building, you’re not going to like the situation. Why? Because home prices are up, thanks to the rising real estate prices, and so are is the price of building materials, needed to build a new home. We can attribute much of this to high gas prices and hurricanes. The good news, in all this, is the low interest rates. You can still borrow at an extremely affordable interest rate.

For the consumer shopping the market, you need to really educate yourself about the rising costs of real estate, the local values in your community, and what mortgage products would most benefit you, when you consider your individual objectives. If you’re like most, you aren’t buying your home for an investment, and you aren’t buying with the intent to sell in a few short years. In the market of today, it would be a wise choice to meet with a financial advisor; someone that has a background in finance, and can help you to clearly define your objects, and choose a mortgage that will reflect those objectives.

Many of the individuals, who are the doomsayers, seem to think that the market can’t sustain this type of growth. That is has occurred too quickly, and like the bubble of the stock market, will burst, leaving many homeowners and mortgage lenders “holding the bag” so to speak. But, you also have many of the intellectuals that say the real estate market was due a burst of growth; that it is normal, healthy, and we should have no trouble sustaining this type of growth. Whatever the end result, right now, the real estate market and the mortgage market are hot items; if you own real estate, you’ve hit the jackpot. If you’re looking to buy, get ready to pay.

Let’s first define what private mortgage insurance actually is, and why you might be required to purchase the insurance. Private mortgage insurance is an insurance purchased to protect the lender, not the borrower. The borrower however pays for the mortgage insurance, and is provided to the lender instead of the 20% down payment normally required when purchasing real estate. The insurance provides the difference between the fair market value of the home and the actual price a lender may be able to sell the property for, in case of a default on the loan. Normally, the lender will require a 20% down payment and forgo the private mortgage insurance option. However, under certain circumstances if the buyer has an excellent credit card debt rating, is well known to the lender, and is deemed to be low risk, private mortgage insurance may be an option offered by the lender.

The current mortgage market seems to be flooded with such varied products as the interest only loan and the 125 loans that private mortgage insurance seems to be a thing of the past. You rarely encounter a situation when the buyer is required to purchase the private mortgage insurance; those situations most likely to continue to require the purchase of the private mortgage insurance are those where the lender is a traditional lending institution. Mortgage companies have long since ceased requiring borrowers to purchase private mortgage insurance.

Mortgage investors, such as the Fannie Mae and Freddie Mac programs, have recently come to the aid of the borrower by introducing an option to the primary mortgage market that allows borrowers to pay as little as 5% down and purchase only enough mortgage insurance to cover 25% of the loan; this creates a potential citing situation for the borrower. The borrower may pay a slightly higher interest rate in order to lower the cost of insurance that the advantage lays here: mortgage interest is fully tax deductible, private mortgage insurance is not.

There’s another option, also regulated by the federal government and passed into law in 1999, known as the homeowners protection act of 1998 established rules for regulation of private mortgage insurance requirements once a homeowner reaches a level of 20% equity. What the law requires, in layman’s terms, is that a lending institution must notify you once your equity levels reach 20% of the appraised value of the home. Once you the kind of 20% equity level, you must be given the option to drop private mortgage insurance. If this proposal had passed into law some 20 years ago, it would have been met with great resistance among the lending community; today, the interest only loan and loans that offer mortgages in excess of the appraised value of the home overshadow the effect of the 1998 homeowner’s act.

Many homeowners seem to mistake the private mortgage insurance purchased in order to secure the loan, with that of the homeowner’s liability insurance. Lenders are responsible for making clear the distinction between private mortgage insurance purchased to protect the lender versus the homeowner’s liability insurance purchased to protect the homeowner. Both forms of insurance will need to be purchased, and the borrower will be responsible for payment of both insurance premiums.

Quite often as we go through the mortgage process, we encounter many unexpected expenses; private mortgage insurance is normally one of those unexpected expenses. As a consumer if you’re contemplating the purchase of a home, contact your local lending institution, or a mortgage company in your area, and asked for information concerning the purchase of a home for first-time homeowners. The information you’re provided should contain all the terms, conditions and terminology explanations that you will need in order to make an educated decision when choosing lenders and homes.