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Unformatted text preview: basis, the amounts are ordinarily collected by the lender with monthly impounds of taxes and insurance. Some lenders will, as an alternative, insure the loan using PMI that the lender pays for by increasing its loan interest rate. In this circumstance, the lender's quoted rate includes the PMI premiums, but since it is, in fact, an interest rate, it is deductible under IRS rules. If the lender charges an interest rate plus the PMI premium, then only the interest is deductible, and the insurance premium is not. Offsetting this advantage or disadvantage (depending upon how long the borrower resides in the property) is the fact that when the lender includes the PMI in its rate, the payments will never change, even when the loan–to–value drops below 80% and the PMI coverage is dropped. At that point, the lender's yield increases by the amount of premium no longer paid. On the other hand, when the tender charges a rate plus a premium, the borrower's payment will decrease when loan–to–value declines to 78% or below, and PMI is no longer required. For short–term ownership, being able to deduct it all as interest may be advantageous. For long–term ownership, the likelihood that payments will someday decrease may be the better choice. In California, the Civil Code allows residential borrowers to cancel PMI after two years if the loan–to–value ratio is 78% of the current market value. But better yet, under federal law, for all new insured loans originated after January 1999, all lenders on FHA insured loans must cancel the MIP coverage when there is at least a 22% home equity. This 22% equity must be shown by an official appraisal, the borrower must have a good payment history, and the loan must be on the books for at least two years. Appreciation, not just principal pay down, counts to measure the 22% or more equity. Special note: Both the California and federal laws cover only new insured loans granted from January 1998 for the state law, and January 1999 for the federal law, but not loans already on record prior to those dates. In both cases, F...
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This note was uploaded on 12/30/2010 for the course SOC 101 taught by Professor Zhung during the Spring '10 term at Punjab Engineering College.
- Spring '10