With the tightening of credit in the housing market, more policies are being written again for private mortgage insurance, which observers believe will continue to be tax-deductible for most homebuyers — and paid by lenders for numerous others.
Traditionally, the one in five home buyers who don't put down 20 percent on the purchase of a house are required to pay private mortgage insurance (PMI), which helps cover lenders in the event of foreclosure. Depending on one's credit rating, a homeowner pays roughly $66 a month for PMI on a 30-year, 6.5-percent interest loan with 5 percent down on a $125,000 home.
Over the past five or six years, many buyers — to avoid paying PMI — took second or "piggyback” mortgages, which carry higher, but tax-deductible, interest payments. But with today's tightening credit standards, second mortgages now are difficult to get.
Forty-three percent more PMI policies have been written the first nine months of 2007, compared with the same period a year ago, said Jeff Lubar, spokesman for the PMI industry's Washington, D.C.-based trade group, Mortgage Insurance Cos. of America. Meanwhile, Congress is expected to extend by seven years a provision passed in December 2006, allowing taxpayers with adjusted gross incomes (AGIs) of $100,000 or less to fully deduct the cost of PMI on homes bought in 2007. The extension is part of HR 3996, or the Temporary Tax Relief Act of 2007, a bill to repeal the alternative minimum tax, he said.
The measure recently passed the Ways and Means Committee and is expected to go soon to the House floor, and then onto the Senate. Under the new provision, PMI's deductibility is good for the life of the loan, Lubar said. So for example, PMI paid on a home bought in 2008 would be deductible for as long as it's paid. Lenders generally will cancel the insurance after homebuyers' payments plus any increase in equity equal 20 percent of a property's market value, usually five years at most.
According to an analysis by Bankrate.com, a homeowner in the 25 percent tax bracket with a $180,000 mortgage would save about $351 in taxes per year because of the law.
The amount homeowners deduct phases out rapidly after an adjusted gross income of $110,000. For homebuyers with AGIs of $105,000, for example, the cost of PMI is only 50 percent deductible — or 10 percent per every $1,000 over $100,000. No deduction is available to homeowners who make more than $110,000.
Homeowners with higher AGIs should consider lender-paid PMI, said David Feisal, senior vice president of Spirit Bank and immediate past president of the Oklahoma Mortgage Bankers Association.
In exchange for a quarter-point higher interest rate, lenders will pay the PMI up front for home buyers, Feisal said.
"It's an all-around better deal for the borrower,” he said. "They not only have a lower monthly payment, but also a greater tax deduction.”
Lenders, Feisal said, pay PMI equal to 1.15 percent to 1.25 percent of the loan for taxpayers with credit scores of 680 and above.
Traditional monthly PMI still is a viable option for most homebuyers, said Jeff Resler, senior account manager for Oklahoma and Arkansas for Winston Salem, N.C.-based Republic Mortgage Insurance Co.
"It depends on what consumers want to put down,” Resler said. "Unless it's 20 percent or more, you don't get out of paying PMI. You pay it one way or another — directly or in a higher interest rate.”
