PMI Is Now Deductible
Mar 1, 2007
Author: Family Realty LLC

So what is PMI?

In a conventional mortgage, a buyer is required to put down a 20% down payment based on the sale price of the home. Private mortgage insurance is paid when a buyer doesn’t pay the full 20% down. This fee is paid monthly by the buyer to protect the bank or mortgage company in the event of foreclosure. It is paid until equity accumulates to a point where there is 20% ownership of the home.

Avoiding PMI with Piggy-back Loans
In recent years, many buyers in an effort to avoid paying PMI have used a piggy-back or secondary loan for their down payment. In this scenario, the second loan is often similar to a home equity loan. Often it will be have an adjustable interest rate and/or a balloon payment that will come due in 3 to 5 years.

So Which is Best? PMI or Piggyback?

It will really depend on your situation. With the deductible aspect to PMI, it is worth considering again. If your home appreciates or you are able to put in some “sweat equity” to increase the accumulated equity of the home to the 20% of the appraised value, in most cases the PMI will be cancelled. However with a second loan, you will continue to make payments until the loan is paid in full.

On a 5,000 home, the piggybacked portion of the loan would cost about ,000 a year while the PMI payment would come to about ,000 a year - or less - depending on the borrower’s credit score.
The tax deduction on the equity loan would be about ,600 for a borrower near the upper income limit. With the new law, the PMI tax break would be about ,200.

That means choosing PMI would cost ,800 compared with ,400 for the piggyback loan, an 0 savings.

To make the best decision, discuss your all options with your Real Estate Agent and Mortgage or Loan Officer. Working with trusted professionals to explain all aspects of various loan products help you to select the best mortgage that works to meet your financial goals.