Mortgage Lowdown

– By Pushpa Sathish, Staff Writer

A low interest and more points on your mortgage may not be such a good thing, according to a new study by Abdullah Yavas, Elliott Professor of Business Administration at Penn State’s Smeal College of Business, and Yan Chang of Freddie Mac. After a detailed perusal of data relating to 3,785 mortgages collected between 1996 and 2003, the duo concluded that those who buy points generally overestimate the time they need to pay back their loans.

The points system works positively for the borrower only when held for a long-enough period, and most of them never do. On an average, they paid off their mortgages 37.5 months earlier than the time when the points would pay off.

By purchasing points, borrowers lower the interest rate on the mortgage. One point is equal to 1 percent of the mortgage, charged as prepaid interest. Points that you pay to purchase your primary residence are deductible in the year you pay them on your federal income-tax return; points you pay to refinance must be written off over the life of your mortgage.

The researchers admit though that this data may be skewed because it was collected during a period of decreasing interest rates and soaring property values, a combination that led to a fair amount of refinancing activity.

– By Pushpa Sathish, Staff Writer

Piggyback loans or mortgage insurance? That will be the question on most homeowners’ minds in 2007 because of a new law introduced by Congress, according to which mortgage insurance will be tax-deductible in the new year. Bankrate estimates an annual savings of $351 for a homeowner with good credit, in the 25 percent tax bracket, and a $180,000 mortgage. Collectively, homeowners across the US stand to save $91 million when they file taxes in 2008, according to the mortgage insurance industry.

Before you rejoice as a homeowner, let me add that the law comes with various strings attached.

• It has to be renewed by Congress next year for it to be applicable in the tax years 2008 and after.
• A full deduction comes only with an adjusted gross income of $100,000 or less.
• The deduction holds good only for those mortgages that are closed in 2007. Loans that are taken out with mortgage insurance in 2006 and before will have to be refinanced in 2007 to qualify for tax deduction on the premiums.
• According to Bob Walters, chief economist at Quick Loans, the new law is beneficial only if you itemize deductions. For a standard deduction, homeowners would have to have a mortgage of at least $130,000 to pay enough interest.

All things considered, homeowners now have the choice between  piggyback loans and a mortgage insurance as options to cover the risks on loans taken with their homes as collateral. Piggybacks, which have so far enjoyed the advantage of being tax-deductible, now have a competitor in mortgage insurance, with homeowners being left to judge for themselves as to the better alternative.

When we are ready to close in on a home, we tend to get overwhelmed by the entire process. There’s so much to do, loans to be procured, insurance… the works. Sometimes in this melee, we may forget certain things. For instance, we may not realize the importance of closing costs or settlement costs.

These costs are associated with the sale of a home or the refinancing of a mortgage and generally range from 3% to 8% of the total loan amount. Usually, when you refinance, the costs are lower and many of the costs can be rolled into the loan. There are certain costs that you just need to pay—for instance some fees and taxes, which the law decries that the buyer pay. However there are other costs that you can negotiate and split with the seller. For instance, you can do so with points. So it is important that you have a good idea of the expenses you can share to reduce your final costs.

–By Priya Jestin, Staff Writer

The Office of Federal Housing Enterprise Oversight recently announced that it would freeze the size of so-called conforming loans that carry lower interest rates. This announcement was made after U.S. home prices fell in October for the first time in 13 years.

The average price of a single-family home fell 0.2% to $306,258 in October. This is supposed to be the first decline in prices since 1993. Data from 14,729 loans made by 82 different lenders is used to tally the average home price. The agency is expected to freeze the conforming-loan limit at $417,000 and defer for one year the reduction mandated by law to reflect the October price decline. The decline in prices is attributed to the cautions attitude adopted by potential buyers who are waiting for prices to stop falling. This means the housing market is flooded with unsold properties.