New PMI Writeoff Law - What You Should Know

Recently President Bush signed a new law into effect granting homeowners’ the benefit of writing off their PMI come tax time.  This is a law that will help some, but not all.  Read on…

Let me start by defining PMI:  PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.

In my opinion, lenders should pay PMI since they are the one’s the PMI protects!  Think about it…PMI is insurance that ensures the lender they will still get their money if you default on your loan.  The fact that the buyer has to pay for their piece of mind is irrational!  Does anybody pay your insurance (other than as an employer benefit)?  No way…and no one ever will.  Okay, off my soapbox and back to the point at hand.

The new PMI law has limitations, so don’t think that you’re going to be able to write off your PMI just because you pay it.  Here are three stipulations on the new law that will eliminate most people.

1. You can only write off your PMI if you purchase your home during the current year of 2007.
2. You can only write off your PMI if your yearly gross income is less than $100,000.
3. The law is only in effect for the current year and has to be reissued for any years following, meaning that you may only be able to write this off for one year!  More detail on this and why insurance companies are lobbying for it below…

Here is another piece of information you may want to be aware of if you are buying a new home.  When buying with an inability to put 20% down, you have two options.

1. Pay PMI until you have 20% equity in the home, then refinance (at a cost to you), and maybe you’ll get the PMI removed, but maybe not.
2. Get a piggyback loan.  This is a loan where you essentially have two mortgages, one at 80% and the second at 20%.  What’s the catch?  The 80% loan is borrowed at a “normal” mortgage rate around 6% (depending on your credit score, income, etc.), but the remaining 20% is borrowed at a rate around 10% for the life of the loan.

Which option is better?  It all depends on your situation.  You will definitely want a trust-worthy, experienced mortgage professional to run the numbers for you.  Prior to this new law, the piggyback loan was most likely your best option.  However, with PMI now deductible for some buyers, you may want to consider this as your buying option.  Keep in mind that lenders pay mortgage brokers more if they can get you into a piggyback loan because the extra money you pay in interest goes to the lender, whereas if you pay PMI, that extra money goes to the insurance company!  To further elaborate on my above point concerning the longevity of this law, the reason this new PMI law was signed into effect is due to the lobbying efforts of insurance companies!  They are, of course, trying to pass it off as a consumer benefit (which it may be in some situations), but in reality they’re trying to entice new buyers into PMI, rather than piggyback loans, in an effort to further line their pockets instead of the lenders’ pockets!

Basically this law will not benefit too many consumers, it is more appropriately deemed a war between the lenders and the insurance companies to see who will end up with our money when it’s all said and done!

Please point out any flaws in my line of thought.

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