PMI deductible for 2007

[Karen Lee]

New for 2007...

premiums paid or accrued for qualified mortgage insurance during 2007 in connection with home acquistion debt on a qualified home are deductible as an itemized deduction.

What's a qualified home? Feeling stupid and don't want to give erroneous info. Got this info from tax forum on 2007 tax law changes. Can only assume PMI is deductible same as mortgage points (acquisition vs. re-fi/home equity).

Be kind please.

Karen

[jainen]

>>Can only assume PMI is deductible same as mortgage points (acquisition vs. re-fi/home equity)<<

You won't find PMI on a refinance. It's only for buying a principal residence with less than 20% down payment--not so much of that going on this year, methinks. I suppose some buyers will sneak into a rental that way too, but it isn't deductible on Schedule E.

Unlike points which are paid all at once up front, PMI is a surcharge to the monthly payment until the policy is canceled.

[JohnH]

Just a random thought here.

Given the current crisis in the lending industry, and assuming some rationality may return to lender's practices as a result, might it be that we will seee more home loans during the remainder of 2007 which will require PMI?

[Karen Lee]

Since PMI will be deductible it won't stop someone from deciding to purchase a home.

The question remains: What is a qualified home?

I was at the IRS site and couldn't find anything on the tax law change that gives the definition.

Karen

[jainen]

>>assuming some rationality may return to lender's practices<<

I can't imagine where you got that idea, unless you are being sarcastic. Anyway, the rational approach would be to require equity, not insurance. If a borrower has nothing to lose, they are more likely to walk away from a property and let the finance companies sort it out.

The lender might be satisfied to just slap on the insurance, but from the point of view of the insurance companies PMI doesn't make so much sense if home values are expected to fall. Look for PMI to be much more restricted as to proving income and debt ratios, and of course the appraisal.

[JohnH]

It's my understanding that a qualified home is a home purchased in 2007 for which the mortgage interest is a tax deductible item. It's also my understanding that the deduction is only available for 2007, which make one wonder why they bothered, unless there is some intent to extend the deduction into the future. Better yet, maybe they will make it retroactive and we can make some $ amending prior year's returns for affected clients.

[Eli]

Just a random thought here.

Given the current crisis in the lending industry, and assuming some rationality may return to lender's practices as a result, might it be that we will seee more home loans during the remainder of 2007 which will require PMI?

John.

If I'm not mistaken I think we will see less home loans with PMI since lenders might be requiring larger down payments (up to 20% +) that might not require PMI payments.

Eli

[JohnH]

Eli:

Yes, that's also a possibility.

But I'm thinking about all those who signed these dual loans to "avoid" the PMI (split-second, 80/20, 90/10, etc.). Presumably those loans will be a thing of the past and the borrowers won't have any choice but to take the PMI option. I believe high LTV loans will continue to be made, but borowers may not have as many options to avoid the PMI.

Technically, I don't think they ever were avoiding PMI- they were just shifitng to a more formal loan structure and getting the tax deduction on the second loan. In many cases, they paid more, even on an after-tax basis, for the second loan than the non-deductible PMI would have cost them. Another example of how the lending industry can easliy confuse the borrower, especially when they just MUST have that house they can't afford.

[mcb39]

Interesting....my Granddaughter bought a home in May with PMI....first time home buyer; Wheda loan., low interest rate. She also got a $5000 Grant from WI to use as a down payment. Each year she lives in the home, she reduces the grant by $1000 and if she stays for five years, she doesn't have to pay it back. She loves the house and plans on living there for a long time and has already done a fantastic job of face lifting. It was an older rental house which had some important remodeling already done. I never would have believed she would get the mortgage all by herself, but she did. I will have to check into how she gets to deduct the PMI. This was a wonderful incentive for a young girl to purchase RE and not have to rent. She has since gotten engaged; so will have help with the payments when her fiance graduates from college in Dec.

[JohnH]

I think your granddaughter's situation is the type that PMI was originally designed to facilitate, by a lending industry which tried to maintain a reasonable balance of risk. But after someone has purchased a starter home, lived in it for a few years & built some equity through principal reduction & appreciation in value, they should generally be able to purchase subsequent homes with a sufficient down payment to avoid the necessity of PMI.

What I view as unwise is established homeowners who purchase homes at the outer edge of their ability to afford, betting everything on ever-increasing real estate values to take them out of their shaky upfront decision. They accomplish this either through purchasing the home with PMI or getting these secondary loans to artificially increase the apparent down payment. It's a shell game because when all the debt is added up, their LTV is so high they really have little or no investment at risk. To make matters worse, they often double up on their speculation by financing these purchases with ARM's, gambling on the hopes that they can either refinance or sell before the rate increase buries them.

This strategy works fine until there's a slump in housing prices and/or a spike in interest rates (or both simultaneously), resulting in people being a slave to their mortgages or else falling into default and possible financial ruin. The end result is that everyone suffers as the market corrects itself, possibly in an inefficient and ugly meltdown. That scenario is well underway right now - only time will tell if it's a temporary painful correction or if we really haven't yet seen the bad side.

[Cathy]

Karen,

Your post was the first time I heard the info....thank you...just been out of pocket for a couple of months.

Finding info on the new 2007 (only) PMI deduction was like looking for a needle in a hay stack on IRS's website.

What I finally found was "For the definitions of home acquisition debt and qualified home, see Pub 936..." There was a link to Pub 936 and of course, it was the 2006 Pub 936. I guess they are saying (at least for now) is that the same definitions apply for "home acquisition debt" and "qualified home" for the 2007 PMI as was the definitions for 2006 in Pub. 936.

I also found "The amount you can deduct is reduced by 10% (.10) for every $1,000 ($500 if your filing status is married filing separately) by which your adjusted gross income exceeds $100,000 ($50,000 if your filing status is married filing separately)."

I assume the above to mean a married filing jointly couple making $110,000 or over would NOT be entitled to the PMI deduction at all, and of course would be pro-rated if the same couple made between $101,000 and $110,000. Someone correct me if I'm wrong, please!