PMI Is A Tax Deduction? Who Knew?

Pic credit Renjith Krishnan

PMI, otherwise know as private mortgage insurance, is that nasty insurance borrowers have to pay that protects the lender on a California mortgage when buying or refinancing a home and your first trust deed is greater than 80% of the appraised value.

For much of the past decade, borrowers opted for a first and second mortgage combination to cover their loan balances because the interest paid on the second mortgage could be tax deductible whereas PMI wasn’t deductible.

However, this is no longer true as hasn’t been since December 31st, 2006.  Initially the tax break was to expire December 31st, 2007 but it got extended through December 31st, 2010 and now it has been extended through December 31st, 2011 however the tax deduction isn’t available to all PMI insurance paying borrowers.

To qualify for a full deduction, a couple or a single taxpayer must have AGI of $100,000 or less to get a full deduction and no more than $109,00 to get a partial deduction. A married person who files separately must have AGI of $50,000 for the full deduction, or no more than $54,500 for a partial.

In this existing lending frontier PMI is a bigger player now that the second mortgage/HELOC market has severely weakend.  I have recently seen refinance borrowers, who want to take advantage of the low mortgage rates have to pay PMI on their new loan even though their previous loan(s) didn’t have PMI.  Why?  Soft appraisals.  If the new loan is greater than 80% of the appraised value, PMI is required.  Sometimes it makes sense to pay the PMI on a refi, sometimes it doesn’t.

Turbo Tax states that the typical homeowner can realize a $350.00 tax break if they meet the income requirements as noted above. Typical is a rather general term but so long as the PMI or private mortgage insurance payer income qualifies as noted above, they may be eligible for the tax break.

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