If you have a mortgage for more than 80% of the worth of your home then you probably already know what private mortgage insurance (PMI) is. In fact, if you opted for a borrower paid PMI loan, you have to pay it every month. Hopefully you also know that under many circumstances PMI is tax deductible, just like mortgage interest and property taxes.

Tax deductibility allows you to reduce your taxable income by the amount you pay for PMI in that year. Hence, this can effectively save you ~25% (or whatever your tax bracket is) on your PMI. If you pay $200 a month in PMI, that’s a cool savings of $50 a month.

The criteria for PMI tax deductibility are as follows:

  • Mortgage must have originated on or after Jan. 1st, 2007 (yes, refi’s count!)
  • Your Adjusted Gross Income prior to deductions must be less than $100k. Each $1k there after reduces the tax deductibility by 10% (completely phased out at $110k)
  • The property must be a primary residence

The tax deductibility of PMI should play a very large role in your decision between picking 80%+ loan options. A borrower-paid PMI scheme can offer many advantages over lender-paid PMI or piggyback loans. PMI tax deductibility will make that borrower-paid PMI option that much more attractive!

Now a brief history of PMI deductibility. Before 2007, PMI was not tax deductible. Also, piggyback loans were nowhere near as common as now. Borrower-paid PMI was the usual option when dealing with 80%+ financing. But with the recent housing boom and all the creative mortgage options that came with it, piggyback loans become more and more popular. Also recall that 80%+ financing was also becoming much more prevalent during the housing boom. In fact, one could argue it was a major cause of the boom, as it opened the housing market to a larger population. To answer this move away from PMI loans (choosing piggybacks instead), it was suggested PMI become tax deductible.

Law makers first passed this into law in 2007. To law makers this was yet another way to help youngsters afford homes (hence the cap on annual income). However, the law in 2007 was quite limited. PMI was only deductible for mortgages that closed in 2007, and the PMI would only be deductible in 2007. The law was set to expire at the end of the year.

Luckily, law makers have extended the law through 2010. What happens after that? We’ll have to wait and see!

Google the topic to get more information. I found this site and this site particularly useful.