FAQ: What is PMI?

Private Morgage Insurance (PMI) is required by a lender when a buyer has less than 20% or the purchase price as a downpayment (this is where the “I need 20% down” myth originated.) The buyer pays the premium but the lender is actually the one insured. Once the equity in the property reaches 80% (either via paying down the balance or an increase in market value of the property), the buyer can cancel the insurance. (Note: This insurance is NOT the insurance that must be carried on FHA mortgages, often touted as advantageous for first time buyers. FHA loans carry a different type of required insurance that lasts for the life of the loan.)

Prior to 2007, PMI was not tax deductible–just a fee that a homeowner had to pay. This resulted in “piggyback” loans–second mortgages that are tacked on to first mortgages. These second mortgages often carry slightly higher interest rates, but the benefit to the borrower was that the two loans in combination added up to more than 80%, and thus the buyer could replace non-tax-deductibe PMI with tax-deductible interest on the second mortgage. You often see these loans referred to as 80/15/5, or 80/20; the first number is the percent of the purchase price borrowed on the first trust (loan), the second number is the percent borrowed on the second trust, and the third number, if there is one, is the amount of the downpayment.

Starting in 2007, PMI is now fully tax deductible IF you’re income is under $100,000. So far, this applies only to loans closed in 2007, so we’ll have to see if this benefit stays in place. If you qualify for this deduction though, it may be advantageous to take one 95% loan, all at the same, lower interest rate, and pay the PMI, since it’s now tax deductible just like mortgage interest. Everyone’s situation is different, so consult a mortgage lender you trust and ask him to run the scenarios to see which option is more beneficial for you.

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