Florida Mortgage Insurance Making a Comeback

This time next year, many Florida homeowners who pay insurance on their home loan will be able to secure an extra deduction on their federal income tax returns.

A new law guarantees that certain borrowers who take out a home purchase loan or engaged in a Florida mortgage refinance in 2007 are eligible to write off all or a portion of their mortgage insurance premiums.

It’s a tax break many in the industry have sought for years because the insurance is often regarded as the same as additional mortgage interest (or points).

Mortgage insurance is required for a borrower with less than a 20 payment down payment; its purpose is to protect the Florida mortgage lender from losses if the borrower defaults on the loan.

The insurance is then cancelled when there is enough equity built up in the home. But deductibility aside, mortgage insurance has been gaining back its lost popularity of late.

According to the Mortgage Insurance Companies of America, 118,214 borrowers used private mortgage insurance while buying or mortgage refinancing in February, an 8.5 percent increase compared with January’s 108,980.

In February 2006, 104,146 borrowers used PMI.

“The mortgage-insurance industry has had a very, very good first quarter,” said David H. Katkov, president of PMI Mortgage Insurance Co. “People are looking at mortgage insurance today as they haven’t in previous years.”

In recent years, many borrowers have opted to get around the insurance by using the insurance by taking two loans: a primary mortgage as well as a second mortgage - a “piggyback” loan in the form of Florida home equity loans or lines of credit.

The equity from the second mortgage fulfills the down payment of the first, and there are tax breaks on the interest of both loans. But many piggyback mortgages have variable rates that fluctuate based on the prime rate, which can be volatile (and has risen over the past year).

• The set rate for mortgage insurance has become attractive to homeowners aiming for predictable loan costs.
• There’s also the simplicity of one set of Florida mortgage loan documents that this option undeniably provides.

Tightened lending standards might also contribute to rising popularity of mortgage insurance; as Florida mortgage providers are more conservative in the aftermath of problems in the subprime market, the risk associated with a piggyback loan probably isn’t as attractive.

The cost of the second loan, along with the hard look at underwriting standards, could have a “double whammy effect” on piggyback loans.

SOURCE: MarketWatch