Monday, February 23, 2009

Things to Consider If You Finance 100% of the Value of a Home

There are a few different ways to obtain 100% financing from institutional investors. Most people believe 100% financing will amount to one loan equal to the sales price or value of a home. Although 100% financing is possible on one loan, there are some other factors to consider when financing one hundred percent.

For example, 100% financing may come with private mortgage insurance (PMI). Although PMI for home loans may be tax deductible for loans closed in 2008, not everyone qualifies for the Private Mortgage Insurance deduction. If you do not qualify for the PMI tax deduction 100% financing is also possible on one loan with no PMI by accepting a higher rate or buying out the PMI upfront.

Some people may choose to split 100% financing into two loans. If you obtain one loan at 80% financing and a second loan at 20% financing you will completely avoid PMI and most people will be able to get a tax deduction for both loans.

So how do you know if you are eligible for the PMI tax deduction for 2008?

Previously, borrowers could not deduct the cost of private mortgage insurance payments on their federal taxes. A new federal law allows qualified co borrowers with adjusted gross incomes up to $100,000 to deduct 100% of their 2008 PMI premiums on their federal tax returns.

Co borrowers with adjusted gross incomes up to $109,000 can take advantage of a partial MI tax deduction (the legislation includes a phase-out by 10% for each $1,000 a taxpayer's adjusted gross income exceeds $100,000 with a cut off of any deduction at $109,000).

Single borrowers are limited to an adjusted gross income of $50,000 to deduct 100% of their 2007 PMI. Partial deductions are possible with a phase-out by 10% for every additional $500 in adjusted gross income with a cut off of deductions at $54,500. The legislation is effective for PMI certificates issued from 2007 to 2010. For clarification see your CPA.

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