At the end of 2006, with the passing of its omnibus tax bill, Congress made private mortgage insurance for middle-income home buyers tax deductible in 2007. Private mortgage insurance, or PMI, is required when a homebuyer puts down less than 20% and protects the lender in the event of foreclosure.
In recent years, home buyers have been using piggyback loans to avoid having to pay PMI. A piggyback loan is when the borrower uses a first loan for 80% of the value of the home, a second mortgage (typically an adjustable rate loan) for up to 15% of the value of the home with a five percent down payment. Because neither loan is for more than 80% of the home’s value, PMI is not necessary. Now, with PMI being tax deductible, the need for a piggyback loan is significantly reduced for middle-income borrowers.
However, like most changes to the federal tax law, there are some caveats:
- The tax deduction only applies to mortgages that are closed or refinanced in 2007.
- The full deduction is limited to homeowners with an adjusted gross income of $100,000 or less. The deduction is still available to those who make up to $110,000, but at a reduced rate. No deduction is available for those who earn over $110,000
- Congress has only made this deduction available for the 2007 tax year. While it is expected to be extended, it is not guaranteed, and;
- Investors are barred and home owners also need to itemize their returns to be eligible.
Keith Munsell 
