PMI stands for Private Mortgage Insurance. When someone takes out a mortgage for more than 80% of the home’s value an additional premium, or penalty depending on how you look at it, must be paid to protect the lenders against default. (a contributing factor why banks would rather foreclose than modify a loan–buyers were paying the insurance in case this happened–but this is a whole other topic). The introduction of PMI is, in truth a double-edge sword: it gives people who normally could not come up with the large down payment, especially in Westchester County where the median home price is approximately $540,000, the opportunity to purchase a home. On the flip side, there’s a reason 20% down-payments have always been required to buy a home. Can you guess which is the group of homeowners who are defaulting on their loans these days?
There’s only 2 ways to avoid paying PMI, 1-Place a down payment greater than 20% or 2-get a second mortgage to cover the difference between the down payment and the 80% value of the home or LTV. Number 2 is the one that has been causing a lot of people to default on their mortgages. You see, the second mortgage is usually a variable interest rate home equity loan or line of credit. Borrowers never calculated the impact of a rate increase on their mortgage payments. But again, this was the only way most people could afford to get into a home. In hindsight, whether or not it was the right decision is a topic for a future post. But at least if you’re planning to buy in the near future, you should plan accordingly.
PMI, STOP IT!
Most people don’t realize that you can get rid of your PMI payments once you believe the amount you owe on your loan has fallen below 80% of the value of the home. For example, if you purchased a home 10 years ago and you borrowed $400,000. You were making PMI payments, but now you believe the home to be worth $500,000 due to appreciation and the payments you’ve made over the years to lower your principal balance. Now what? Will the bank automatically eliminate your PMI premiums? NO WAY! You must petition the bank to eliminate them by showing proof (usually an out-of-pocket appraisal). Another way to eliminate the PMI premium, if you believe that the amount you owe is at least 20% lower than the amount the house is worth, is to refinance for an 80% loan or less if possible. Hopefully, the interest rate will be lower as well.
If You Can’t Beat Them, DEDUCT them.
If you not eligible to eliminate your PMI premiums, then deduct them from your taxes. Starting with loans issued or refinanced in 2007, and continuing through 2010, you can deduct each year’s premiums paid on PMI for your principal residence and for a non-rental second home. The tax break was originally good for 2007 only, but the government extended it for three years. Unless it’s extended again, you won’t be able to take the deduction beyond 2010.
The deduction begins to phase out once your adjusted gross income reaches $100,000 ($50,000 for married filing separately) and disappears entirely at an AGI of $109,000 ($54,500 for married filing separately). In general, you can only deduct the premiums paid for the current tax year. If you pre-paid premiums for future years, that portion must be allocated to those future years. Rules can vary for mortgage insurance provided by the Federal Housing Administration, Department of Veterans Affairs, and Rural Housing Service, so consult a tax adviser.
Again, consult your tax adviser on this matter.
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