PMI Tax Deduction Extremely Limited
The Telegraph, a Nashua, NH newspaper, reported February 13, 2007 that the recent law allowing home owners to deduct private mortgage insurance premiums has a narrow scope and short life span.
Mortgage insurance, commonly referred to as PMI, pays the lender, if a borrower defaults on a loan. Most lenders require borrowers to buy mortgage insurance when borrowers put down less than 20 percent of the purchase price of a home at the time of closing. Borrowers can cancel the insurance when their equity in the home reaches 20 percent.
"The federal tax deduction only applies to mortgages taken out since Jan. 1. It expires at the end of this year. Homeowners can’t claim the full deduction if they have more than $100,000 in household income and can’t claim it at all if their income exceeds $109,000. They must itemize deductions to claim it."
The cost of PMI varies depending on the particulars of
the loan, but it typically averages 0.6 to 0.8 percent of the original loan
amount per year.
Mortgage insurers welcome the law. The deduction will make mortgage insurance more competitive with what are referred to as piggyback loans, which have always been tax deductible.
"Piggyback loans are home equity loans or lines of credit that let buyers who don’t have 20 percent down avoid mortgage insurance. They borrow 80 percent of the home’s value with a first mortgage, then borrow whatever else they need with second, and in some cases third mortgages.
"These are also called 80-20 or 80-10-10 loans. The piggyback portion has a higher interest rate than the first mortgage.
"Piggybacks have taken a big bite out of the mortgage insurance market in the last five or six years."
During the real estate boom years mortgage insurance often was canceled in just a few years.
"By law, borrowers can ask their lenders to cancel mortgage insurance when the equity in their homes, based on the purchase price, reaches 20 percent. It can take many years to reach that point by making mortgage payments alone because, in the early years, payments are mostly interest, not principal.
"However, most lenders will let borrowers cancel their mortgage insurance if their loans are at least two years old and they get an appraisal showing that, thanks to appreciation, their equity now exceeds 20 percent."
Leave it to Congress to pass a tax break that begins and ends in the same year.
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