Congress passed two laws on Tuesday. One makes homebuying more affordable, the other helps out those who are losing their homes to foreclosure.

* The Mortgage Forgiveness Debt Relief Act of 2007. This legislation waives taxes by creating a three-year exception for borrowers whose mortgages are modified, with a portion of their debt forgiven, to avoid foreclosure or other financial distress.

* Mortgage Insurance Tax Deductibility. This bill makes mortgage insurance premiums tax deductible for all mortgages originated for the next three years. Mortgage insurer Genworth Financial estimates that this tax break is worth $350 to the average taxpayer who has purchased a home with less than 20 percent down.

The advantage of the second law is this: Suppose you wanted to borrow 90% of the purchase price of your next home. You have two options. One: you can take out a 90% loan, but the bank will make you take out private mortgage insurance (PMI). Two: you can take out one 80% loan at a good rate and a second loan for the other 10%, but at a higher rate. You won’t have to pay PMI.

People used to think taking out the second loan was better, for two reasons. One, the interest on the loan was deductible on your Schedule A, lowering your income taxes. Two, PMI was not tax deductible, so you basically were paying insurance that, most likely, you would never use (and, if you did use, basically protected the lender, not you!).

Congress has now passed a law making PMI tax-deductible, so for those of you who itemize, it makes taking out one 90% loan a viable option.

Did that make any sense?

House Passes 3 Key Housing-Related Bills – By Jim Abrams, The Associated Press and Dow Jones International News, by way of Realtor.org

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