2007 PMI Deduction
The new Tax Relief law passed in late 2006 has given a benefit to potential homebuyers. The 2007 PMI deduction helps make home purchase with a smaller down payment possible.
2007 PMI Deduction
PMI refers to Private Mortgage Insurance. This is a rather strange kind of insurance in that the borrower pays the premium in order to insure the lender. Most lenders have required PMI insurance whenever the value of the mortgage is 80% or more of the value of the home. This meant that unless you make at least a 20% down payment or get a real good deal on the home, you are going to need to purchase PMI.
In the past, PMI was now deductible. In order to avoid it, many homeowners would take out a double loan. The first mortgage was for 80% of the value of the home, and the second loan was for the other 20%. What this meant was that the buyer was borrowing the down payment. If the buyer has money saved for a down payment, it could be invested some place where it might yield a higher return. If the buyer had no funds, the second loan provided the down payment. In either case, PMI was, most likely, not necessary.
The new tax law the PMI deduction good for the year 2007. It is only in effect for this one year, although Congress is likely to renew it. The limit for claiming the 2007 PMI deduction is $100,000 adjusted gross income. From $100,001 to $110,000 adjusted gross income the amount of PMI that can be deducted drops by 10%. Over $110,000, you can not take the deduction at all.
The intent of the law was to encourage home ownership by making buyers less scared of making a purchase with a smaller down payment. Since the cost of the PMI would most likely be covered by the gain from taking the deduction, this extra cost is eliminated for the buyer. This deduction only applies to homes purchased during 2007. If your home was purchased prior to this year, you can not take the deduction. Nor can you take it when you refinance the loan.
Although the 2007 PMI deduction is applicable only for homebuyers during 2007, it is another example of a deduction that attempts to spur some other type of activity. In this case, it is intended to give a boost to the homebuyer with a smaller down payment.