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Tuesday, January 16, 2007

Deductibility of Mortgage Insurance Tax for 2007

Found out recently that because of the recent changes in tax laws, mortgage insurance tax (also called Private Mortgage Insurance or PMI) will be deductible in 2007. The only problem: the tax deduction is allowed only if the premiums you pay are for a mortgage that is taken out in 2007. In addition, the deduction is currently good only for 2007! If some one is qualified to take the deduction, they can deduct PMI on 2008 tax returns (for the year 2007).

The mortgage insurance tax is levied when borrower pays less than 20% of down payment and therefore, obtaining loan of greater than 80% of the home value. So borrowers had to pay mortgage insurance tax. Depending on the size of the mortgage loan, the tax could amount to over $50 per month.

The tax can be removed by the lender once the home value increases or the mortgage balance drops below the 80% of the home value. However, I have read that home borrowers in some cases had problems getting their lenders remove that tax. Plus, the homeowners also my have to get an appraisal done on their own cost to prove that the remaining mortgage loan balance constituted less than 80% of the value of the home.

The alternative to paying PMI is to take a second loan. In our case, when we bought the house, since we did not have 20% down payment, instead of taking a single loan of over 80% which would have caused us to pay the PMI, we took a second loan for the additional amount over 80% of the loan. We had to pay a higher interest rate on the second loan but we didn't have to worry about PMI, and the mortgage interest rate on both loans were tax deductible.

If some one is buying a house and taking out a mortgage, it's worth while to compare the total cost of a single loan of more than 80% of the house value which would require paying PMI, against two loans (one for 80% and the second for the remaining amount over 80%). Since there are additional interest rates and loan origination and other costs associated with the second loan, the single loan option may be more attractive in some cases despite having to pay the PMI.

An online calculator that can be used in determining whether to pay PMI or take a loan with higher interest rate is provided at the DecisionAide's site; the link is provided below:

Mortgage Insurance versus Higher Interest Calculator

There are also other Web sites that offer mortgage-related calculators, so it's worth while to check them also.

For related links on PMI, see:

St. Petersburg Times - Mortgage Insurance Tax Break

Bankrate.com – The Basics of Private Mortgage Insurance

posted by Ruby @ 7:26 AM

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