REAL ESTATE TOPICS:  PRIVATE MORTGAGE INSURANCE (PMI)

Private Mortgage Insurance (PMI) is almost always charged by the lender of home purchase money when the buyers have less than a 20% down payment.  Incidentally, in Arizona, we almost never use real “mortgages” – rather, we have loans secured by a Deed of Trust – but, we still commonly refer to them as mortgages and that term carries forward on this topic.  And, as a matter of interest PMI is also the last “I” in the acronym, PITI – which stands for: Principal, Interest, Taxes, & Insurance – that’s Private Mortgage Insurance – not Homeowners Hazard & Liability Insurance.

PMI is an insurance that provides protection for the lender and no one else.  However, it is always paid for by the borrower.  If the borrower defaults on the loan, PMI is there to protect the lender – not the borrower.  The rates for PMI are rather expensive – typically about 1% of the loan amount per year.  So, on a $150,000 loan that will be about $125 per month ($1,500 per year) for the entire time it takes to establish an equity position of at least 22%.  That’s a lot of money!  Also, in order for the lender to then cancel the insurance, the borrower will have to be current on payments and have a decent payment history.  To make matters worse, none of that expense has been tax deductible in the past.

However, by virtue of a last minute omnibus tax bill - the Tax Relief and Health Care Act of 2006, the Federal government started to allow the premiums paid for Private Mortgage Insurance (PMI) to be tax deductible.

The new law provided the following:

“Section 6050H of the Internal Revenue Code of 1986 (regarding mortgage interest) is amended by adding at the end the following new subsection:

In general.--Premiums paid or accrued for qualified mortgage insurance by a taxpayer during the taxable year in connection with acquisition indebtedness with respect to a qualified residence of the taxpayer shall be treated for purposes of this section as interest which is qualified residence interest.”

Fortunately, the Mortgage Forgiveness Debt Relief Act of 2007 (H.R. 3648) signed by President Bush will extend the deduction allowance through 2010 for qualified homeowners.  To qualify, families must have an adjusted gross income of $100,000 or less.  Families with incomes up to $109,000 are eligible for a partial deduction.

So, check with your accountant to be sure how this may affect your return.  It may also be worth checking with several lenders to find out if refinancing makes sense.  It may be time to get rid of a high interest rate “second mortgage” or piggyback loan - refinancing in favor of a lower rate, single mortgage with PMI when the borrower does not yet have 20% equity in their home.

DISCLAIMER

John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745.  He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000.  In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®:  ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute.  And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.

Please note that this article was written by him to reflect the author’s opinion of good practice at the time of its’ writing for the general benefit of those considering sale or purchase of residential real estate, it is not intended as definitive legal advice and you should not act upon it as such without seeking independent legal counsel.  Frequent changes in the law and standards of practice may cause this information to become outdated and no longer applicable or even incorrect.