A friend of mine over at This Wasn’t In the Plan posted today about how she wants to pay down her mortgage so she can eliminate PMI (Private Mortgage Insurance) payments from her mortgage. A great idea that reminded me I’d heard a very quick blurb on the news about PMI and taxes that I hadn’t heard before, so I’m guessing many others haven’t either.
For those who don’t have it – or who have it and don’t understand it – PMI is extra insurance that lenders require from most home buyers who take out mortgage loans that are more than 80 percent of their new home’s value. It protects lenders against losing their shirts if a borrower defaults on a loan. The PMI company line is that they enable borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent – even 0% down payment.
While this means that people can buy a home sooner without waiting years to accumulate a large down payment, these low/no-money-down loans are part of the reason for the sub-prime mortgage crisis, as many people bought homes they just could not afford (and adjustable mortgages that were no good for them).
But I digress.
These loans are riskier for the lenders because people are more likely to default on a loan in which they have very little money invested. PMI doesn’t protect you – it supposedly protects the bank if you default. In foreclosures the bank must sell the house and then get reimbursed for the difference, if any, between the sale price and the loan balance by the PMI insurer. The PMI insurer can then come after you for what they had to pay the bank – which doesn’t seem fair at all, does it?
(I don’t have any idea if these PMI insurers are/have been paying off the lenders during this mortgage crisis or not, but it would be interesting to find out… )
The bottom line is that buyers with less than a 20 percent down payment are normally required to pay PMI. In recent years savvy mortgage brokers and buyers have turned to piggyback loans in an attempt to avoid the PMI requirement. Blended mortgages allow borrowers without a 20 percent down payment to take out a home equity line or a traditional second mortgage simultaneous with their first mortgage to provide the necessary down payment, avoiding PMI. It’s even more of a moneysaver because the interest on second mortgages and home equity lines is almost always tax deductible.
That cost the PMI industry to lose a lot of business. So they’ve pushed to make PMI premiums tax deductible, and it seems they’ve been successful.
Yes, PMI is now tax-deductible. So, while it sucks that you have to pay it, at least your tax bill this year could be smaller.
Let the festivities ensue!
As always, please remember that I am not an expert on finance, or an accountant. I’m just an accountant’s daughter. So, please, please, please contact your accountant for expert advice.