PMI (or How I Learned to Stop Hating my Lender and Loving Tax Reform)

Back in the good ol' days, if a home buyer did not have at least a 20% downpayment towards the purchase of a property, the mortgage lender stuck a little gift called PMI (private mortgage insurance) onto the home buyer's monthly mortgage payment. This PMI was, in fact, an insurance policy to protect the LENDER from possible future default on the loan by the BORROWER. But the borrower was forced to pay for the insurance policy, and received no benefit from having that insurance policy applied to his/her loan. The additional charge on the monthly mortgage payment could easily run anywhere from 0.19% to 0.9% of the total loan amount. Things were rather dismal for the borrower when it came to PMI.

Until now.

Effective in 2007, a tax reform measure regarding PMI now gives the borrower a reason to smile just a little bit. Here's the scoop: if household income is less than $100,000, mortgage insurance premiums are now tax deductible, just like mortgage INTEREST is deductible. Hoorah! This tax reform change applies to PMI, as well as FHA mortgage insurance and the VA funding fee. The purchase of a home or the refinance loans that involve such mortgage premiums must have closed on or after January 1, 2007.

For more detailed information on how this tax change might be helpful to you, please talk with your tax advisor, or contact my local (Winnetka) Baird & Warner mortgage expert, Reed Brunzell, at 847-446-1855.

Realtor recommendations on Service Providers

Before I became a Realtor, I would heed the warnings of the media and well-intended friends on accepting recommendations from a Realtor for a mortgage lender, a home inspector, or other such service providers. My own instincts told me "There must be a selfish motive for a Realtor to give me specific recommendations on mortgage brokers, home inspectors, etc. Otherwise, why would the agent bother to suggest one company over another? Shouldn't I always find my own service providers, keeping that selection independent of my real estate agent?"

Fast forward to the present time, which finds me well into my real estate career and a sufficient number of transactions to my credit that give me a foundation of knowledge that I lacked before entering this business.

A Realtor (a designation earned only by those licensed agents who belong to their state and national professional association of real estate professionals) is obligated to follow a Code of Ethics. In Illinois, agents and brokers are also required to follow the dictates of the state's license law. One of the basic tenents of the Code and the law is giving honest service to clients and customers (more discussion on another day on the difference between a client and a customer!) Providing a client or customer with a recommendation for mortgage brokers and home inspectors certainly has the potential for fraudulent personal gain by the agent. HOWEVER, if the agent is following the dictates of the Code and the law, such recommendations will be provided to a client/customer only with the intention of providing a high standard of service to that client/customer and help him or her reach the goal of buying or selling a property.

Why bother giving recommendations at all? Because - when a home buyer or seller hires someone to provide service related to a real estate transaction, and that service provider is unqualified or unknowledgeable or dishonest or inept, the transaction can oft times fail to close, and sometimes cause financial harm to the buyer and/or the seller. I had two such situations recently.

The most disturbing example was a buyer client; this person worked very hard to find the "just right" property to purchase as a first-time buyer. This buyer needed a mortgage to acquire the property, as most buyers do. The deal "fell" because the buyer's mortgage broker could not deliver the mortgage to close the transaction. A conversation with the mortgage broker who is based in my office in Winnetka, revealed how the buyer could have certainly obtained the mortgage needed, including monies to help pay for closing, and a program to provide continuing income tax advantages over the life of the loan, above and beyond the standard deduction for interest on the mortgage loan.

The buyer worked several weeks to identify the right property for purchase, negotiate the contract, pay for a professional home inspection, pay the real estate attorney for what added up to several hours of work on the transaction, only to end up empty handed and nervous about trying again to purchase something else.

If a buyer or seller can feel there is reason to trust his/her agent, then it follows that the agent's recommendations for service providers can be trusted as well. It is in the best interest of the CLIENT to opt for excellent service on a mortgage, a home inspection, and an attorney. And if it's good for the client, it's just plain 'ol good for the agent as well.