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Why Isn't Private Mortgage Insurance Tax Deductible?
| | Thursday, September 15, 2005 @ 09:38 AM EDT
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Read more archived articles about Law and Legal Issues
Federal government claims revenue shortfall
"Why isn't my $124 monthly home loan PMI (private mortgage insurance) premium tax deductible just like interest?" That was the essence of an e-mail I received from an irate reader who recently bought his first home with a 5 percent down payment. Only later did he and his wife discover their $124 per month PMI expense is neither tax deductible nor does it build equity on their new home.
Trying to be sympathetic, I reminded my home buyer friend that thanks to a very low 5 percent down payment, he and his wife control a home that is probably appreciating in market value at an annual rate exceeding his down payment.
Even if that home only appreciates at the historic 5 percent annual rate, a 5 percent return on a 5 percent down payment is a 100 percent annual yield.
Yes, monthly mortgage payments are required, but after the interest and property tax
deductions, owning a home is often cheaper than renting equivalent housing.
WHAT ARE P.M.I. PREMIUMS? Many prospective home buyers have never heard of PMI premiums. PMI only applies to low or no down payment home purchase or refinance loans where the mortgage lender makes a loan exceeding 80 percent loan-to-value.
With good credit, home buyers can now purchase with down payments as low as 10 percent, 5 percent or zero percent cash. Some lenders will even loan up to 103 percent of the home purchase price, including closing costs.
But PMI is required for these institutional first mortgages exceeding 80 percent of the house or condo appraisal. The reason is these are risky loans for lenders. In the event of a foreclosure loss to the lender, the PMI insurer then pays any loan loss exceeding 80 percent of the original loan amount.
PMI is an expensive but "good deal" for home buyers. It enables them to purchase with little or no cash down payment.
SHOULD P.M.I. PREMIUMS BE TAX DEDUCTIBLE JUST LIKE INTEREST? For several years, the PMI industry has been heavily lobbying Congress to make PMI premiums tax deductible just like interest is deductible for millions of homeowners.
Several times, PMI premiums almost became tax deductible. But last-minute Congressional tax law changes prevented PMI deductions.
The argument is PMI enables millions of home buyers to purchase, thus helping the national economy, increasing employment, and resulting in a national home-ownership rate that now approaches 70 percent. But the increased PMI home-ownership cost should be tax deductible just like mortgage interest, the PMI insurers argue.
The argument against PMI deductibility is the Treasury would suffer tax losses, resulting in increased deficits. Unless corresponding tax revenue can be found, PMI tax deductibility hovers in tax never-never land.
PROBLEMS WITH P.M.I. Among many homeowners and mortgage lenders, PMI has a "bad rap." The primary reason is some mortgage lenders refuse to cancel PMI premiums even when it is no longer needed to protect the lender after the loan-to-value ratio declines below 80 percent.
In 1999, Congress enacted toothless legislation to require mortgage lenders to cancel PMI premiums when the loan-to-value dropped below 78 percent of the original loan balance.
That was a cruel joke because it didn't consider market-value appreciation or increased home values due to a homeowner's capital improvements. The result is most borrowers won't meet this 78 percent PMI test from paying down their mortgage until after at least 10 years.
However, many mortgage lenders have adopted the Fannie Mae and Freddie Mac guidelines that PMI premiums should be cancelled if the home loan is at least 24 months old, the borrower has an on-time payment record, and the borrower's equity is at least 20 percent as shown by a new appraisal from an "approved appraiser" paid by the borrower.
That seems fair to borrowers. But some loan servicers create unreasonable demands, such as imposing the "10-year rule" in the 1999 law passed by Congress, which benefits the PMI insurers.
HOW TO GET RID OF YOUR P.M.I. If your home loan includes a monthly PMI premium, you have two ways to cancel the PMI and save that amount:
1. Ask your lender or loan servicer to cancel the PMI premium. You will probably be told you must pay for an appraisal from an appraiser on the lender's "approved list." The typical cost of $300 to $400 will be very profitable if you are sure you have at least 20 percent equity in your home either from market-value appreciation and/or capital improvements.
2. If our lender or loan servicer refuses to follow the Fannie Mae and Freddie Mac guidelines of 24 months on-time loan payments with at least 20 percent equity as proven by a new appraisal, your best and least expensive alternative is to refinance with another lender who does not require PMI.
ASK FOR A REFUND WHEN YOUR P.M.I. IS CANCELLED. No matter which of the two methods explained above you use to get rid of your PMI, ask for a PMI refund. PMI premiums are collected monthly, but remitted annually by the mortgage lender to the PMI insurer so you may have a PMI balance for unearned premiums that are refundable to you.
Refund checks of $100 to $1,500 or more are not unusual. But you have to ask. After paying off your old mortgage, or getting PMI cancelled, if you don't receive a PMI refund, local Small Claims Court is the appropriate place to claim your bonus for your hard work to get rid of your PMI premium.
F.H.A. HOME LOANS DO NOT HAVE P.M.I. However, if you have an FHA home loan, you do not pay PMI. Instead, you pay MMI (mutual mortgage insurance) or MI (mortgage insurance). Only if you pay off your FHA home loan in full might you be entitled to a partial refund.
When you pay off your FHA mortgage, ask if you are entitled to any MMI or MI refund. If you are entitled to a refund but do not receive it within 45 days, contact HUD at 1-800-697-6967 or write to U.S. Dept. of Housing and Urban development, PO Box 23699, Washington, DC 20026-3699. On the Internet go to http://www.hud.gov/offices/hsg/comp/refunds/index.cfm and enter your exact borrower's full name and FHA case number to learn if HUD owes you a partial MMI refund after paying off your FHA mortgage.
BY-Bob Bruss
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