Does Private Mortgage Insurance Offer Any Tax Advantage?

By Ann White

Private mortgage insurance (PMI) is required when you purchase a home with a down payment less than 20% of the loan. PMI protects the lender from loan default, but it also allows you to buy a home with less cash reserves. Purchasing a home and financing with private mortgage insurance can also earn you a tax advantage.

PMI Tax Advantage

If you don’t have 20% to put down on a home, you are often give the option to take on a second mortgage or pay the lender mortgage insurance. Most borrowers opted to take on a second mortgage because it cost less than PMI.

However, in 2007, private mortgage insurance became tax deductible. As a homeowner, PMI may be cheaper than getting a piggyback loan, or second mortgage, on your home. It is important to analyze both sides in oder to make an informed decision.

Caveats

Four crucial caveats come into effect along with the private mortgage insurance tax advantage. Your home has to be purchased after 2007. If you purchased it before then, you have to refinance it after 2007. Your adjusted gross income must be less than $100,000 annually. Congress must renew the deal every year. It has been renewed for 2010, but it may not be next year.

Also, you must take a standard deduction. If you take an itemized deduction, then you will not qualify for the PMI tax deduction. This tax break typically adheres to families with income beween $50,000 and $100,000 a year.

Tips

You can eventually cancel private mortgage insurance. Once your loan value reaches below 80%, you are able to drop your PMI. Though you may end up paying more upfront for PMI, in the long run it may pay off. Unlike PMI, piggyback loans cannot be cancelled in time. You are typically locked into a 15 to 30 year loan with an adjustable or balloon interest rate.

Does Private Mortgage Insurance Offer Any Tax Advantage?

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