At the eleventh hour, Congress added a bonus to the fiscal cliff prevention package--tax breaks for those who must purchase private mortgage insurance.
In the deal, homeowners can deduct private mortgage insurance (PMI) premiums from their federal taxes. The law not only benefits those purchasing property this year, it is retroactive for those who bought in 2012.
“In the past there’s been little we could tell homeowners who couldn't produce the 20% down in terms of having to turn to PMI,” explains Lesley K. Larson, Mortgage Lending Manager at Educators Credit Union ($1.5 billion, Racine WI). “Up until now the biggest benefit of PMI for the borrower was that it allowed them to get the mortgage loan, but the cost is added to their monthly mortgage payment.”
“Now, borrowers can see relief from the additional expense because they can claim it as a deduction,” she adds. “Plus, even though the law went into effect this year, Congress made it retroactive for 2012 too so homeowners who purchased last year can also benefit.”
Considerations before claiming PMI on your taxes include:
You can only deduct PMI up until your adjusted gross income (AGI) reaches $109,000 ($54,500 for married borrowers filing separately).
PMI deductions apply for primary and non-rental second homes.
You can only deduct premiums paid for the current tax year.
An itemized return is needed to claim PMI deduction.
Will I Save Money?
Houselogic.com provides an example of how much money you can save on your taxes by claiming PMI: Let’s say a married couple filing jointly with an AGI of $100,000 bought a house on Jan. 1, 2013, for $200,000. They put down 5%. By the end of 2013 they paid $1,500 in PMI premiums ($125 times 12 months). By reducing their taxable income by $1,500, and assuming a 15% tax bracket, they lower their tax liability by $225 (1,500 x 15%).
“With the uncertainty in today’s economy, the PMI deduction is an extra bonus to homeowners,” says Ashley Minshew, Mortgage Lending Manager at Robins Federal Credit Union ($1.7 billion, Warner Robins, GA). “I think that most borrowers are eager to take advantage of any tax break available. It helps to make up for some of the adjustments people are now seeing in their paychecks.”
What Should I Know About PMI?
Although having to purchase private mortgage insurance is not the end of the world, mortgage experts say that borrowers should understand all their options.
“The main consideration is what will the PMI cost,” says Minshew. “There are several options out there--monthly premiums and single premium PMI to name a couple. Are you able to afford a higher monthly payment with less down up front? What lender can give you the very best PMI rate? That’s going to be a credit union. Our members see the benefits of doing business with lenders who have a proven track record. The PMI companies recognize that fact based on the quality of our loans and we are able to offer the very best PMI rates in the marketplace.”
Borrowers also need to understand the reason for PMI. “PMI does not protect the borrower, but it protects the lender,” Larson explains. “A lot of people may not understand this as a first time buyer. This is not insurance to cover you should you become unable to pay your mortgage; its lender protection in the event the borrower defaults.”
“From an underwriting standpoint, I would say that PMI is not a cure-all for a reduced down payment,” Minshew stresses. “Will the borrower be able to handle that monthly commitment? For the borrower, there needs to be an understanding that the amount of equity you have in your home is reduced since a lower down payment was made up front. It’s a mental thing!”
Although the new law makes tacking PMI to your mortgage bill a little easier to swallow, Larson stresses that all buyers need to do their homework before deciding upon a lender.
“Do your shopping but check with your credit union first,” Larson says. “Credit unions will be honest with you because they aren’t there to make money off your mortgage. Also, you may see a bank rate that is lower, but do you know what is going on behind that advertised rate?”
Larson says that she’s talked to members who have ended up paying $8,000 in origination fees because they followed an attractive rate but didn’t read all the fine print. “If you come to the credit union you’ll have a few points on a fixed rate loan, but the end result will be nowhere near what you’d end up having to pay in the short and long run at a bank.”
“Also, credit unions are known for educating and walking the member through the process step by step,” Larson adds. “We always take the time to explain every disclosure and not just rush the member through the process. To me that’s what credit unions are all about. Members first, they are why we are here.”