Who doesn't hate private mortgage insurance? For years lenders have charged PMI fees to borrowers who couldn't afford to put 20% down when purchasing their home, and why not? Private Mortgage Insurance or PMI makes complete sense from a lenders perspective. When they agree to lend money to borrowers with little or nothing down, they are assuming all the risk on a loan, and when a borrower doesn't put any of their own money into a transaction, that risk can be great. Enter Private Mortgage Insurance. Companies like Radian and Genworth Financial offer Private Mortgage Insurance Policies to banks that cover the lender's loss in the event of foreclosure. The Lender of course graciously passes this cost on to the borrower. Unfortunately from a Borrower's perspective, PMI doesn't make a whole lot of sense, because the cost of putting less than 20% down when you buy a house can mean hundreds of dollars per month in private mortgage insurance premiums.
Creative mortgage professionals, who actually care about their client's best interests, figured out early on that there were a lot of very creative ways to save borrowers thousands of dollars by utilizing mortgage options that don't require a borrower to pay PMI. The most common of these options is to split your total mortgage into 2 separate mortgages, called an 80/20 or an 80/15/5 Piggy Back Loan, but there are dozens of other creative ways to avoid PMI. Even though the piggyback options often came with higher interest rates on the second mortgage, the benefit of choosing one of these creative options were great. First in almost every situation, the total monthly mortgage payment of the 80/20 or piggyback option is less than the total payment of a traditional mortgage with private mortgage insurance. But more importantly, the interest you pay on the piggyback's second mortgage is entirely tax deductible, while the monthly private mortgage insurance premiums are not. The tax savings made the choice a no-brainer!
As always, recent changes to the status quo are promising to turn conventional wisdom on its head. Recently, congress has passed tax legislation that would renew for two years a host of expired business tax credits and popular individual tax breaks, and introduce a new, one-year itemized deduction for mortgage insurance premiums. A CNN Money article explained: "The legislation allows taxpayers who itemize their deductions to deduct premiums paid for mortgage insurance - which typically is required when home buyers purchase their homes with less than 20 percent down. Currently, only the interest paid on one's mortgage is deductible if the taxpayer itemizes deductions. The new insurance premiums deduction will only apply to mortgage insurance contracts issued in 2007 and is only available to taxpayers whose adjusted gross incomes do not exceed $110,000 ($55,000 for married taxpayers filing separately)."
It's still too early to think paying PMI is the better bet though, and I would consult your mortgage professional and tax accountant about what is the best option for your situation. As of right now, the new deduction only applies to mortgages that close in 2007 and for right now, that's it. It's a one shot, one year deal. Congress may chose to extend it, but right now I think they are testing it out. Also there are income limits, so if you make more than $100,000 per year, this won't even apply to you. Finally if you usually take a standard deduction, you would have to have a pretty decent size mortgage to even make itemizing worth your while. According to a Bankrate.com article, quoting the chief economist of a large internet mortgage company ( I won't use their name because I used to work there and won't add fuel their SEO machine) this particular chief economist said: "You need to have a mortgage of about $130,000 or so to even pay enough interest to hurdle the standard deduction. In practice, he says, this means that the deduction is available to households with incomes between $50,000 and $100,000."
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