Marc's Mortgage Matter's

If you’re an honest, law-biding citizen, should you care if the IRS starts comparing mortgage payments and income? What about if you’re a roofer who makes half his income in cash? If Jane Doe claims she makes $2,000 per month on her taxes, yet her mortgage payment is $3,500, should that be a reason for Ms. Doe to be investigated?

In yet another story yesterday, it appears that the IRS “will study whether it should make greater use of data on mortgage-interest payments provided to it by banks.” The IRS currently uses such data to send notices to non-filers who it believes should have filed a return. The data could also be used to target for audits individuals who don't file tax returns, or who report less income than they paid in mortgage interest. Of course, if you’re a struggling borrower that is using money out of your savings account, or from Mom & Dad, to make the mortgage payment, you don’t need two guys with badges showing up at your office….

HOME buyers are often advised to come up with at least a 20 percent down payment, or face the likely additional expense of private mortgage insurance (PMI). But this year, at least, that counsel would not have saved them as much money as in the past. 

Rules put in place in late 2008 by Fannie Mae and similar rules adopted by Freddie Mac are less favorable to borrowers who put down 20 percent to 25 percent, considered to be the industry minimum. (Fannie and Freddie are the government-controlled companies that establish the underwriting standards for most of the nation’s loans.)

For most people, it turns out, smaller down payments result in lower interest rates. Whether that benefits borrowers in the long term, though, is open to debate.

Take, for instance, borrowers who want to buy a $400,000 home, and who have a credit score of 720, which is considered very good.

In late August, such borrowers who had $80,000 saved for a 20 percent down payment would have qualified for a 4.875 percent rate on a 30-year fixed-rate loan. But that was also the rate offered to borrowers putting down only 5 percent, and therefore required to have private mortgage insurance.

Oddly, those who put down 25 percent, or $100,000, were saddled with a higher interest rate, 5.375 percent. The underwriting rules from Fannie Mae and Freddie Mac consider borrowers in the 20 to 25 percent down payment category to be the riskiest, in part because they are not required to carry private mortgage insurance. At higher down payments, however, rates begin to fall.

Amy Bonitatibus, a spokeswoman for Fannie Mae, said that the policy wasn’t meant to encourage lower down payments, which some have seen as the main culprit in the home foreclosure crisis. “It’s just a less risky loan from our point of view,” Ms. Bonitatibus said, because the lender’s exposure to foreclosure losses is largely eliminated by mortgage insurance.

She said the policy didn’t benefit only Fannie Mae and lenders that sell loans to the company. Borrowers benefit too, she said, especially those who would otherwise have had to stretch for a bigger down payment and leave themselves with no financial cushion. These borrowers can instead save the extra cash they might have put toward a bigger down payment, keeping it handy for emergencies.

Besides, Ms. Bonitatibus noted, as soon as borrowers pay off enough of their loan principal to establish a 20 percent equity position in the home mortgage, insurance is no longer required. While borrowers who take out mortgage insurance can indeed enjoy lower interest rates, their monthly payments will be larger than those who made the larger down payments, because the loan itself is bigger.

A borrower who put down 25 percent for a $400,000 home would make a monthly mortgage payment of $1,680, while the borrower who put 15 percent down would pay $1,906 — or $1,799 in principal and interest, plus another $107 monthly in mortgage insurance. (The mortgage insurance is tax deductible, however, so depending on a borrower’s financial circumstances, the net mortgage liability would probably be less.)

Most experts still advise borrowers to make a down payment as large as they can, because the increased equity will help them in the long term. Typically, borrowers maintain savings equivalent to at least nine months of mortgage payments.

Those who choose to make a lower down payment in the expectation of terminating their private mortgage insurance after a few years may encounter a harsh surprise. With property values declining, some lenders have balked at releasing borrowers from mortgage insurance. However, once values begin to back up, as most believe, that issue will be moot.

The following was actually developed as a mental age assessment by the School of Psychiatry at Harvard University. Take your time and see if you can read each line aloud without a mistake. The average person over 40 years of age cannot do it!

1. This is this cat.
2. This is is cat.
3. This is how cat.
4. This is to cat.
5. This is keep cat.
6. This is an cat.
7. This is old cat.
8. This is geezer cat.
9. This is busy cat.
10. This is for cat.
11. This is forty cat.
12. This is seconds cat.

Now, go back and read the third word in each line from the top down.