Private Mortgage Insurance Explained

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Alert!  Private Mortgage Insurance now tax deductible for many home owners with a new law effective Jan 1, 2007!

Private mortgage insurance, or PMI, is one of the most commonly misunderstood concepts in the mortgage industry.  So what is PMI? 

In short, PMI is an insurance policy for which you as the homeowner pay the premium each month, but it doesn’t benefit you at all.  This insurance policy insures the lender in case you don’t make your payments and go into default.  If this happens, PMI guarantees the lender that they will get their money. 

PMI is required on any mortgage over 80% of the appraised value or sales price of the home. 

But wait a minute, you say, that’s almost everybody these days.  Who has 20% down to put into a house? 

Well, the good news is that congress has just passed a law that makes mortgage insurance tax deductible for new mortgages closed after January 1, 2007.  The law applies to families with household incomes less than $110,000 per year.  Families with incomes less than $100,000 will have the full deduction, and families with incomes from $100,000- $110,000 will have a partial deduction.

What this means is that in some cases, it will make more sense for families in this income bracket to obtain a single mortgage instead of the old way of dividing a mortgage into an "80/20" or a 1st mortgage of 80% with the remainder on a 2nd mortgage.  This table shows an example of how mortgages were typically structured before this law was passed:

The law is currently in place only for 2007, but congress may extend this deduction to future years.

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