Submitted by Richard Allen, EA, AFSP
Adding Value to Your Tax and Accounting Services Private mortgage insurance (PMI) provides a lender 10 percent of the cost of the loan should the borrower default on the mortgage. The lender rolls the cost of the PMI into the original loan, increasing your monthly mortgage payment. The borrower cannot negotiate the rate of the PMI, but there are other ways to lower or eliminate PMI from the monthly mortgage payment.
I checked my client tax files recently and found that about 10% of my clients who itemize deductions are paying PMI. These taxpayers are paying anywhere between $500 and $2,000 EVERY YEAR in PMI premiums. The 2020 Consolidated Appropriations Act, allows this PMI may be deducted as itemized deductions.
While there is no statutory limit on the amount of PMI premiums that can be deducted, the amount might be reduced based on taxpayer(s) income.
The deduction begins phasing out when a homeowner’s adjusted gross income, or AGI, is more than $100,000. This income limit applies to single, head of household or married filing jointly taxpayers. The phaseout begins at $50,000 AGI for married persons filing separate returns.
The PMI deduction is reduced by 10 percent for each $1,000 a filer’s income exceeds the AGI limit. The deduction disappears completely for most homeowners whose AGI is $109,000, or $54,500 for married filing separately taxpayers.
PMI premiums are very profitable for mortgage companies. They have no incentive to reduce or eliminate these insurance premiums.
Ways to lower PMI include the following:
Put More Money Down. Buyers can increase the down payment on a house. All mortgage loans in which the loan exceeds 80 percent of the price of the home – in other words, loans on which ther down payment is less than 20 percent – automatically get PMI. Provide a high enough down payment to knock the total loan under the 80 percent value, and bypass dealing with PMI altogether.
Use the 80-10-10 Method. Split the purchase loan using an 80-10-10 method to eliminate PMI: Pay 10 percent of the price of the loan as a down payment. Take out a mortgage loan for 80 percent of the price of the loan. Finally, take out an additional loan to pay for the rest of the 10 percent of the loan. The buyer will pay a higher rate on the second loan than on the primary mortgage, but it may save lots of money by eliminating your PMI payments.
Improve a Credit Score. Buyers should wait to purchase a home until their credit score increases. PMI payments are set depending on the credit rating of the borrower at the time of the mortgage.
Refinance the Home. The owners will get a new mortgage loan, terms and PMI rate if they refinance. They will also experience additional fees and closing costs. Make sure they don’t exceed what would normally be paid in PMI to make it worthwhile. Or at least make sure that the savings you will see on PMI costs will help recoup the cost of the refinancing fees within a reasonable amount of time.
VIP. Make Extra Payments. Pay the mortgage down to the point where they have 20 percent equity in it, and then the owners should be allowed to cancel the PMI. In fact, if they get their loan-to-value ratio down to 78 percent, the federal Homeowner’s Protection Act will require the lender to drop the PMI insurance. They will probably need to request that this be done, but the lender can’t refuse them at that point.
NEXT STEP. Tell the taxpayer(s) to immediately contact their mortgage company, and to tell them their accountant advised them to request elimination of the Private Mortgage Insurance (PMI) as required under the federal Homeowner’s Protection Act. I have seen in most cases, the mortgage company will immediately drop the PMI charges. In some cases, the mortgage company may require a current appraisal – or accept the local county appraised value as shown on the property tax bill details.