 Avoid
PMI with lender-paid insurance
|  Dear
Dr. Don,
I've heard that you can avoid PMI and only have
a 10 percent down payment by something called a Single File. I'm not
sure if that is the correct term. The explanation was that it was
a prepayment of the PMI, which is equal to 1 percent of the note:
i.e., $180,000 would equal $1,800 added to the original note, thus
making it tax-deductible interest. Can you clarify what this is really
called and how it works? -- Tim Terms
 Dear
Tim,
SingleFile is a proprietary mortgage insurance
product offered by MGIC, a mortgage insurer. It is lender-paid mortgage
insurance. With this type of mortgage insurance, the lender pays
the mortgage insurance premium, but in turn, charges the homeowner
for this expense either in the form of a higher interest rate on
the mortgage loan, a mortgage origination fee or some combination
of the two.
Since mortgage insurance premiums are not tax-deductible,
but mortgage insurance expense can be used as a tax-deductible expense,
if you itemize your deductions, having the lender pay the insurance
premium and charge you a higher interest rate for doing it effectively
converts an insurance premium into a tax-deductible interest expense.
Mortgage points come in two flavors: discount points,
which are prepaid interest, and origination points, which compensate
the originating lender for its services. Review IRS
Publication 936, Home Mortgage Interest Deduction, or talk to
your tax adviser about the tax deductibility of the point(s) the
lender is charging for this loan.
If your loan-to-value, on a property, is greater than
80 percent on a conventional mortgage, the first mortgage lender
will require mortgage insurance. Lender-paid mortgage insurance
is an approach that makes sense in recasting that expense as an
interest expense that is tax-deductible. It doesn't mean you shouldn't
consider paying PMI yourself, or using a piggyback loan to avoid
PMI.
The Mortgage
Professor offers a way to compare costs between a lender-paid
premium, a homeowner-paid premium and a piggyback loan.
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