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Author: dharmadollars Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121565  
Subject: Re: Mortgage interest deduction question Date: 11/27/2003 9:08 PM
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In response to my following comment, Peter comments as below:

"(1) an add-on fee for a CLTV greater than 90%, and (2) higher interest rates on the two loans because of the greater imputed risk deriving from no equity in the transaction. Even after your secondary financing has been paid off the higher reate on the underlying first will remain."

I'm no expert on underwriting guidelines, but I seem to recall reading over on the Buying a Home board that keeping the first mortgage under 80% is all that is needed. I'd suggest posing this question over on that board. There are a couple of mortgage pros that hang out over there who know what's going on in this area.

I respond: With all due respect, I might be considered an expert on underwriting guidelines. I've been active in mortgage lending for 23 years. Keeping the first mortgage at or below 80% avoids PMI. Even without PMI CLTVs in excess of 90% result in add-on fees. When the CLTV reaches 100%, you still do not need PMI but you will face higher rates because of the imputed greater risk inherent in a "no-buyer-cash-equity" structure. It's in the loan pricing; I see it on the daily sheets.

Peter also responds to my following suggestion--
"If you have 401k plans with loan provisions, and you have sufficient vested money in the plans, consider taking out loans...."

as follows:

Of course, the interest on a 401k loan won't be deductible. That gets you to essentially the same place as taking equity out of the current residence.

I agree with the factual accuracy of Peter's observation. I made the suggestion in the event the current house is or becomes listed before the equity loan has been put in place. Once the house is listed, I know of no lenders who will close the loan.

Another minor consideration is that the HELOC will either have closing costs at the time of settlement, or will contain provisions that closing costs be reimbursed if the loan is closed within a stipulated time period. The 401k loan carries no such costs. This saving would offset some of the lost interest deduction.

The bottom line is that regardless of the equity source, get some and avoid 100% CLTV financing if possible. A short term cost of secured funds for a downpayment will save you substantial money over the longer haul.

And thanks to Peter for raising his points.

Regards,
dharmadollars
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