PMI-Private Mortgage Insurance

PMI (Private Mortgage Insurance) is insurance written by a private company protecting the mortgage lender against loss occasioned by a mortgage default. A lender requires PMI if the borrower’s first loan amount is over 80% LTV (loan to value.) For example if someone purchases a home for $100,000 and borrows over $80,000 on the first loan, he or she will pay PMI. With traditional PMI, the monthly mortgage insurance payment is added to the payment every month.

A Borrower may request the PMI to be cancelled when:
1. The balance of the loan is first scheduled to reach 80% of the original value of the property.
2. The date the principal balance of the loan actually reaches 80% of the original value of the property. This is shown with an appraisal from the lender’s certified appraisal companies.

PMI will automatically terminate when:
1. The principal balance of the loan is first scheduled to reach 78% of the original value of the property. On 30 year FHA loans, the borrower must pay the annual mortgage insurance premiums for at least 5 years even if they obtain 20% equity within the 5 years.

In order to cancel PMI, the borrower must not have made any payments 60 or more days late within the most recent 2 years and no payments 30 or more days late within the most recent 1 year. No tax liens are allowed on the property.

PMI Tax Deductible? Congress passed the Tax Relief and Healthcare Act in 2006 which recommends that PMI be tax deductible. It states that PMI will be treated as fully tax deductible for taxpayers that have adjusted gross incomes of less than $100,000 ($50,000 in the case of a married individual filing a separate return.) The taxable amount is reduced by 10% for every $1000 over $100,000 of adjusted gross income. So, if the adjusted gross income is $110,000 or more, PMI is not tax deductible.

This bill states that the tax deductibility is only applicable to mortgage insurance contracts written after January 1, 2007 and does not apply to PMI accrued or paid after December 31, 2007.

The IRS will interpret this bill and put together a tax code defining and stating the regulations of how the tax deductions may be applied. You may view IRS regulations at www.irs.gov As of today, there are no regulations pertaining to PMI tax deductions described in the website.

It is important to note that until the IRS interprets this bill and forms its regulations; no one will know exactly how the rules and guidelines will work. It is also very important to understand that even if 2007 PMI is tax deductible, it may not be deductible in 2008 or beyond. The borrower must choose his or her loan program based on their overall needs, not just on tax deductibility! And it is always advisable to instruct the borrower to consult his/her tax accountant.

How to avoid PMI

1. TAMI (Tax Advantage Mortgage Insurance) Second Mortgage
2. 2nd Mortgage

Jon Platz
Countrywide Home Loans