Private Mortgage Insurance and Your 2007 Tax Deductions

Purchasing a home with little or no down payment can benefit buyers. However, Private Mortgage Insurance (PMI) is required of all buyers whose down payment is less than 20% of the purchase price. And, the price these buyers pay for PMI is a premium that lenders require to protect themselves from financial loss should the buyer default on the loan.

Previously, PMI was not tax deductible and often represented a sizable increase in monthly payments for the buyer. In order to get around this, many buyers opted for a 2nd mortgage, often at increased interest rates in order to avoid paying PMI. Why? Because the interest on the 2nd mortgage, while substantially higher than the 80% first, then became tax-deductible.

As soon as the loan balance in combination with appreciation in the value of the property exceeds 80%, private mortgage insurance can be removed. However, the lender will not alert the borrower to this. It is the homeowner’s responsibility to inquire.

Congress just passed a law changing the tax code to allow PMI to be claimed as a tax deduction. There is a catch or two, however:
· The deduction only applies to households earning less than $100K annually;
· If the annual income is less than $110K, but more than $100K, a proration table identifies allowable deductibility in that PMI;
· In order to use the PMI tax deduction, the buyer must itemize deductions when computing their tax liability for 2007; and,
· This tax deduction is good for 2007 only; Congress must enact another law (or write an extension to the new one) for the deduction to be carried over to 2008 and beyond.

Is it worth it to itemize? One rule of thumb suggests that, if the mortgage is around $130,000, itemizing is worthwhile. For specifics about this new opportunity, it is wise to consult a tax professional. I know several, should you wish a referral.

Check out my January newsletter for more information on PMI and the 2007 tax deduction.