Traditionally, if you couldn’t afford a 20% down payment on a house, you had to pay private mortgage insurance, or PMI. To avoid this, many people now take out “piggyback” or second mortgages, which carry higher (but tax-deductible) interest payments. But Congress just passed a provision allowing taxpayers with adjusted gross income of $100,000 or less to fully deduct (if they itemize) the cost of private or government mortgage insurance. The mortgage insurance contract must be issued in 2007, and currently only 2007, unless they extend it. More information can be found in this MSNBC article “Homeowners’ Lucky Day”.
This is potentially good news if you’re currently trying to buy a house with less than 20% down, but doesn’t really help the people who are already paying PMI.
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The msnbc link doesn’t work
Fixed, thanks.
Interesitng… they’ve been pushing this for a while now…
there are a lot of loan products out there these days that will provide a LTV of 80% + without the PMI requirement.
Great information. This needs to be known, especially now, so home owners can make better decisions on what mortgage loan structure they should have.
Is this tax deduction really worth it??? I used an online calculator for, say, $200,000 1br condo, with 5% down. Loan=190k. Rate=6.25%(as of dec12), Mortgage payment=1169. PMI=88. How do you calculate your tax savings if your mortgage payment’s interest, pmi, and property taxes bring you to the lower tax bracket? (do you assume your gross income before figuring out how much these housing expenses can save you in taxes? During the first 5yrs of mortgage, one can average 80.0% of payment as interest for itemizing purposes). If i placed 20% down, Loan=160k, mortgage payment=985, 0 PMI. (save 184/month in mortgage, but lose ~5.3% 1yr cd savings from lost down payment; but less itemized interest). So, i dont know what to think. I still think paying 88 more to save 10,000 in my example (which would earn say 5.30%CD) is not worth it. What do you think? Lastly, is it worth to take the PMI, pay the extra money so that you have 20% equity in your home to hopefully be able to cancel PMI, and would you benefit. (sadly, i dont think so.)
ooops… i meant “…paying 88 more to save 10,000 in my example (which would earn 5.3%CD if it wasnt utilized as down payment) is not worth it.
This is almost certain to be extended every year like a ton of other tax provisions.
I don’t see this as a good thing really. The government is promoting the idea of not putting as much down on your house, since they’ll now be subsidizing part of that cost.
It’s kind a catch-22 though – home prices go up because of low rates and lax lending, which means fewer people can truly afford to purchase a home, which means they put less down…
Oh man! I just missed this by a month and a half…
Jesse is exactly right. Also, this and the mortgage interested deduction do nothing to make homes more affordable. If you offer everyone the same subsidy, all its going to do is inflate the price of the item involved.
To SavingEverything:
Would I borrow money at 6.25% to invest in a CD paying 5.3%. Let’s see, hmm… let me think… that’s a tough one. OK, let’s the math.
Pretax mortgage: 6.25%
Pretax CD: 5.3%
Marginal tax bracket: x%
Aftertax mortgage: 6.25% * (1-x)
Aftertax CD: 5.3% * (1-x)
Difference in rate on paying larger down payment as opposed to investing in CD: [6.25% * (1-x)] – [5.3% * (1-x)] = .95% * (1-x)
From a mathematical point of view, regardless of your tax bracket you save more with the larger down payment.
Thanks for posting this. My fiance and I just started the process of looking to buy our first home. We make a combined income of $97,000 so we might just make the cutoff. We were worried about the PMI payments because the real estate market is so expensive in Northern New Jersey and a 20% down payment would leave us living paycheck to paycheck. We’re going to have to explore this new information now and might have put off getting a mortgage contract for a few weeks.
What if I refinance my home in 2007. Will I still qualify to deduct my PMI monthly fees?, which I pay $400 a month.