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Real Estate Q & A

A Late Payment Hinders Canceling PMI

June 28, 1992|ROBERT J. BRUSS

QUESTION: I phoned my mortgage company recently and asked them to cancel the PMI(private mortgage insurance) on my house. The woman said I would have to wait two years because I was late with a payment six months ago.

She also said that if I had called before then I could have canceled the PMI. Up to that time I hadn't been late with a payment in four years and I have enough equity to qualify for the PMI cancellation. If I have met the criteria at one point isn't that enough to allow me to cancel the PMI? Is there anything I can do besides wait the two years?

ANSWER: As you know, the purpose of PMI is to protect the mortgage lender from loss on the portion of the mortgage above 80% loan-to-value. Apparently you obtained a 90% or 95% mortgage when you purchased your home.

At first the PMI was necessary. However, as the loan became more mature and you paid down the loan balance while the house--hopefully--appreciated in market value, the need for PMI on the portion of the loan above 80% became less and less. If your loan is now less than 80% of the home's current market value, there is no need for PMI and it should be canceled.

However, your one late payment six months ago is causing the lender to hesitate. I suggest that you persist in your quest to drop the PMI. Unfortunately, only a few states have laws specifying when PMI must be dropped; so unless your state has such a law, you are at their mercy. But if you explain to the lender why that one payment was late with good reason, and if you persist, you should be able to get your PMI removed, so your monthly payment can be reduced. Don't give up.

Depreciating Home Reduces Cost Basis

Q: During various job assignments out of the country we rented our home and depreciated it prior to the 1986 Tax Reform Act. What effect will that depeciation deduction have on our profit tax when we sell the house and use that once-per-lifetime $125,000 tax-free exemption?

A: When you deducted depreciation during the period your home was rented to tenants, the depreciation deduction reduced your adjusted cost basis. At the time you sell, your profit is thereby increased.

For example, suppose you paid $100,000 for your home and deducted $10,000 depreciation while it was rented to tenants. Your adjusted cost basis became $90,000. If you sell it for a net (adjusted) sales price of $200,000, you will have a $110,000 capital gain profit. Without the depreciation deduction, your capital gain in this example would be only $100,000.

Using the "over-55 rule" $125,000 home sale tax exemption, up to $125,000 of your sale profit will be tax-free. To qualify, you must be 55 or older on the day of sale, have owned and lived in your principal residence any three of the five years before its sale and never have used this tax break before. For further details, please consult your tax adviser.

Home Equity Loan Can Jeopardize Refinancing

Q: I contacted my current lender about refinancing our home loan. Since interest rates aren't quite low enough to make refinancing the obvious choice, the person I talked to suggested I take a home equity loan instead. But he warned me if I take a home equity loan and then decide to refinance the current first mortgage the home equity loan must be at least one year old before refinancing. Is this just a quirk of that lender or do all lenders do this?

A: The major secondary mortgage market lenders, such as Fannie Mae and Freddie Mac, don't want to buy refinanced mortgages where the homeowner took cash out of the refinancing. So one of their rules says any existing financing must be at least 12 months old, otherwise it will be considered to be a cash-out loan. Your lender apparently sells its mortgages in the secondary mortgage market and gave you accurate advice about a possible refinance pitfall. However, not all lenders follow that same rule.

Increased Payments Cut Interest Costs

Q: I have heard that by paying the interest on my home loan one month in advance along with my regular monthly mortgage payment I can reduce the number of years that I need to carry the mortgage. If this is true, how is this done? Can it be done with an adjustable mortgage too?

A: This question is often asked. To save thousands of dollars of interest on your mortgage, you'll need to cut its term from 30 years to perhaps 20 or 15 years. Although your monthly payment will have to increase to do this, the interest savings are far greater than the amount of increased monthly payments. There are several ways to do this with either fixed- or adjustable-rate mortgages by making extra principal (not interest) payments each month:

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