Question: My wife and I plan on buying a house -- that is, if interest rates ever come down to some reasonable figure. Our question: Is it necessary that I buy mortgage insurance so the house will be paid for if I die?
Answer: If you really mean "necessary," the answer is no. Mortgage insurance is not usually required by the lender; the house itself must be adequate collateral or you wouldn't get the loan.
If you mean "Is it a good idea?" then I can't give you a specific answer without knowing a lot more about your personal circumstances.
But I think there are some misconceptions about mortgage insurance, and your question provides an opportunity to shed some light on the subject.
Mortgage insurance is not a special breed of cat. It is simply decreasing term life insurance with the original face amount and the reducing coverage roughly (but usually not exactly) tied to the mortgage balance.
A decision on the need for mortgage insurance should be made only in the context of your entire life insurance program.
Of course, the purchase of a house introduces new elements into your calculations of the estimated needs of your surviving dependents in the event of your death.
For example, your wife needs to make and informed guess as to whether she would continue living in the house of would sell and move elsewhere. If she would stay, you have to include in her needs the cost of carrying the house.
But if she is likely to move, then you need to guess at whether the house would bring more or less its cost. In other words, the house becomes an asset that may or may not generate cash for investment and income.
The purchase of a house does not in itself create a need for additional insurance. It only creates a change in your financial situation, which in turn requires a new insurance analysis.
Your insurance agent can help you make that new analysis. But don't be stampeded into buying possibly unneeded insurance by an emotionallly oriented sales pitch tied to the mortgage debt you have just acquired.
Q: We bought our first house early in 1980. We've heard a lot about the tax savings available when owning a home. Do we deduct the entire monthly payment? If not, how do we figure what the deductions is?
A: No, you can't deduct the entire mortgage payment. But since this is the first year of the mortgage and very little of your payment is going toward principal, you will probably end up deducting most of it. Here's how to figure it.
The allowable deduction is the total amount of interest and property taxes paid in 1980. The holder of the mortgage should provide you each year with a tally of the amount of interest you paid on the mortgage during the year.
If they give you instead a printout of your payment schedules, then add up the interest component or each payment you made in 1980. Check off the payments you are claiming this year so you'll know where to start for 1981.
Property taxes work a little differently. If you pay the taxes yourself, simply claim the amounts you paid in 1980. But if the bank pays the taxes for you, you can't claim the amount you paid into the bank escrow account as a part of each monthly payment.
Instead, the proper deduction is the amount the bank actually paid in taxes on your behalf during the year. If the bank or mortgage company hasn't provided you with an analysis, ask for the numbers.
Q: I sideswiped a telephone pole with my car and sustained about $300 damage. With $200 deductible on my car insurance. I didn't report the accident because my premium would have gone up more than the extra $100 it cost me. Is this $300 a valid casualty loss?
A: Only $100 of the loss is valid for a tax deduction on Schedule A. Here's how you arrive at that amount.
From the $300 loss you must deduct the $100 that the insurance company would have reimbursed you. You can't deduct on your tax return any loss that would have been reimbursed if you had filed a claim.
Then from the $200 balance, you deduct the $100 exclusion that the IRS applies to each individual casualty loss "event." That leaves you with a $100 deduction you can claim on your return.