New for 2007, PMI is Tax Deductible

After much lobbying, private mortgage insurance (PMI) is now tax deductible for refinance and purchase loans taken out after January 1, 2007.  This benefit was buried deep in the Tax Relief and Healthcare Act of 2006.  This is great news for millions of homeowners making owning a home more affordable.   For decades, lenders have required homeowners who do not have a 20% down payment or at least 20% equity in their homes to pay PMI.  PMI is an insurance policy the lender takes out on you to insure that if you were to default on the mortgage, the lender would recoup their money.  Put another way, it is an insurance policy you pay for but provides no benefit to you.  It doesn’t help you if you default, it helps the lender.   There used to be absolutely no financial reason to ever elect to pay PMI and it was to be avoided at all cost if possible.  PMI can be several hundred dollars per month depending on your credit profile.

While this is great news, do not mistake this bill passing as something being done as an act of kindness.  PMI companies have seen their policy revenue fall dramatically over the past several years with the development of piggyback mortgages.  A piggyback mortgage is where the loan officer breaks your mortgage up into two pieces.  They give you a first mortgage of 80% of the purchase price and a smaller second mortgage for the remaining balance.  For instance, if you only had five percent as a down payment you would get an 80% first mortgage and a second mortgage for 15% and you would put five percent down.  By structuring the loan this way, you do not have to pay the PMI charges.  The combined payment with the two mortgages is lower than one mortgage with PMI.   Piggyback mortgages have saved homeowners thousands of dollars.  In fact, I probably only close a handful of transactions annually with PMI because there are plenty of ways to avoid it for most borrowers.  Typically, if PMI is required it is because there are no other options.

This bill is the result of lobbying by PMI companies so they wouldn’t find themselves out of business.  Nevertheless, it is still a good thing.  However, even with PMI being tax deductible it still probably won’t be better than avoiding it altogether.

The main points of the bill are:

• Homeowners making less than $100,000 per year may deduct the full cost of the annual mortgage insurance premiums
• If adjusted gross income is above $100,000, the deductible portion of the premium is reduced by 10% for each $1000 or fraction thereof.  Now in english: this means if you make $101,000, you can deduct 90% of the mortgage insurance premiums paid.  This also means the maximum income allowed for the deduction is $110,000.
• Mortgage loan (purchase or refinance) must have been closed in 2007.  This means you won’t be able to deduct the premiums on your taxes this April.  You have to wait until next year.   PMI premiums paid in 2006 are not deductible.
• Only primary and second homes are eligible.  Rental income disqualifies the second home deduction.

If you obtain a mortgage this year with PMI, make sure you talk with your tax professional about this new benefit to fully take advantage of it.  Mortgage insurance company, MGIC, has a good presentation on the bill.