Tax break for PMI payers
A new income-tax deduction is available to homeowners who carry private mortgage insurance -- a protection for the lender should the buyer default.
The Tax Relief and Healthcare Act of 2006 -- which went into effect Jan. 1 and will end Dec. 31 -- added a provision for home buyers with down payments smaller than 20% that allows them to deduct the total cost of PMI they may be required to carry. To qualify, their adjusted annual gross income must not exceed $100,000, and their deductions must be itemized.
That’s good news for home buyers with inadequate down payments who cannot qualify for second mortgages. Nationally, nearly 10% of mortgage holders have PMI. The number in California is slightly lower, according to the California Mortgage Bankers Assn.
Even with the new deduction, the best financial tack to take may be avoiding PMI altogether by taking out a second loan.
PMI and the deductible are good options when absolutely necessary, said David Soleymani, managing director of First Capital Mortgage in Santa Monica. “But that’s the most positive thing you can say about them,” he added.
That’s because PMI still is costly and best avoided, said Dan Weiss, a mortgage broker at Toluca Lake-based Golden State Lending Services.
The good news, however, is most people manage to avoid it by using blended mortgages, or “piggybacks” -- home equity lines and traditional second mortgages to make up the remainder of the 20% down payment and avoid the need for PMI.
Here’s a comparison: Buyers of a $600,000 home who choose the PMI plan make a 5% down payment of $30,000. Their first mortgage -- 95% of the purchase price -- is $570,000. The monthly principal and interest payment on that loan (with an interest rate of 6%), is $3,417, plus the PMI payment of $342, for a total of $3,759.
In contrast, borrowers using a blended mortgage plan put 5% down, get an 80% first mortgage of $480,000 at 6%, for which they pay $2,878 a month. The 15% second mortgage of $90,000, with interest at 7.25%, comes to $614 per month, for a total monthly payment of $3,492.
“PMIs cost more monthly, period,” Weiss said.
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Diane Wedner
