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PMI Tax Deduction

Conventional PMI Options

Mortgage-InsuranceIt’s common knowledge that home mortgage loans with less than 20% down typically need to be covered by some sort of mortgage insurance.

For conventional loans, it is usually referred to as “private mortgage insurance” (PMI), for government loans (FHA, VA and USDA), the insurance is some sort of program offered by the federal government that also has costs associated with it like PMI, but it has a different name.

While I am licensed to do all of these types of mortgages, for this post’s purposes, I will write only about the insurance that is private – PMI for conventional loans.

There are many different ways to insure a conventional mortgage. All of which are types of PMI. Each one is shown below.

Borrower Paid – Monthly
This is the PMI you probably know about; it’s simply a monthly insurance fee that you pay each month until your loan is eligible to be uninsured. For a well-qualified credit scenario, this tends to cost about .05% of your loan amount each month; for a $200K loan, that’s about $100 a month.

Borrower Paid – Single
This is a one-time fee paid at closing by you or by the home-seller that covers the loan until it is paid in full. For a well-qualified credit scenario, this tends to cost about 1.7% of your loan amount; for a $200K loan, that’s about $3,400. If you do the math, you will see that $100 per month versus $3,400 paid once has a break-even point of 34 months. This means that this option is typically much better than “Borrower Paid – Monthly” if you intend to keep the loan long-term. It’s of incredible value if you can get your seller to cover that cost for you at closing (have your real estate agent talk to me before writing your offer)!

Lender Paid – Single
This is the same as “Borrower Paid – Single” but the lender increases your rate to cover that cost – typically the increase is 0.375%-0.75% in rate depending on the loan amount and the credit-scenario. This is a great way to make your mortgage insurance tax deductible. Presently, mortgage insurance is not tax deductible. If we build it into your rate, it becomes interest and, in most cases, will become a tax deduction for you. Check with your CPA to make sure you can write it off (I have to say that because I am not a CPA)!

Borrower Paid – Split Premium
This is a hybrid of the first and second options above; you or your seller pays a one-time fee at closing of 1% of the loan amount and you then pay a monthly cost of about 0.0275% each month for well-qualified credit borrowers. In dollars, using the $200K loan amount example above, this would be $2,000 one time and about $55 per month.

To get numbers for each of these options for your specific loan scenario, whether you are in Wisconsin or California, please be sure to contact me for more information.

MI Deduction to Stop

Intended for 2007, extended through 2011

The tax deduction for mortgage insurance was created through the Tax Relief and Health Care Act of 2006 and was intended to apply to mortgage insurance policies issued in the year of 2007.  Since then, it’s been extended to include the premiums paid through 2011 because of the slow recovery in the housing market. It seems, however, that the MI will stop being deductible in 2012 unless Congress acts.

Guess what?!  They’re on recess into January.

It’s my understanding that the MI deduction will be completely eliminated and will not be available to any taxpayer in 2012 and beyond.  This is definitely something I have an issue with – and anyone with an interest in the housing market should also take issue with – as it is rare for the newcomers (i.e. first time home buyers) to get a home anywhere without paying some sort of MI.

Please use this link to contact your representatives and senators to let them know that you would like this extended. Tell them exactly why it’s important to you. It doesn’t have to be long and formal; short, sweet, to the point and just enough details to make your point will work perfectly. Don’t be intimidated, either, as it’s their job – the elected officials’ – to listen to you.

Of course, this post is not intended to provide tax advice; please contact your CPA for that.

If you have questions about a home loan, please contact me to get started on a free consultation.