PMI is NOW Tax Deductible

[photopress:Anne_business_card_pic.JPG,thumb,alignright]My friend and colleague (disclosure) Anne Brown of AB Homelending and I have been discussing the fact that PMI is now tax deductible.  Here are her thoughts:

“It’s taken a long time, but finally Private Mortgage Insurance (PMI) is tax deductible.  A loan over 80% loan to value (less than 20% down payment) is required to have PMI unless the loan is split into a 1st and 2nd mortgage.  Until recently, the additional cost of this insurance was not tax deductible. This is Great news, but proceed with caution…     
Here are my two cents: If you take a loan with PMI then the question is what will the investor or PMI company accept for an appraisal to prove the 20% equity.    Obviously their motivation is to A) be protected and B) make money (respectively).  From previous experience I’ve seen in-house appraisals come in lower than market value so be aware that there is a factor of lack of control for removal of the PMI.  Who would want to be stuck with the PMI if the new value is challenged? Just my thoughts. Anne Brown”

Unfortunately her thoughts raise more questions than they answer! LOL  So I thought maybe we could have a discussion here and invite other lenders and accountant types to comment on this important topic.

My thoughts (Ardell speaking here, not Anne)

Back in the old days, when I started in real estate, it was common for the first mortgage to be 95% with 5% down at one low rate.  The monthly payment included the PMI charge, which was not tax deductible.  PMI being Private Mortgage Insurance insuring the lender on th 95% financing loan for the amount above the 80%…in this case 15%.

Today, instead of PMI, most borrowers get a first mortgage for 80% at a LOW rate and a second mortgage at 15% at a HIGH rate in order to avoid PMI.

The question of the day therefore is, when is the buyer better off WITH the PMI instead of the HIGH RATE second?  At least that is MY question of the day.  How does a buyer evaluate which would be better in the long run for them?  I expect the high rate second was cheaper before this news that PMI is tax deductible, or so many would be going that route.  Does this news change that?  If so, does it change it for everyone…or only people in very high tax brackets?

A tough topic…but an important one.  Hope those who know more on this will comment freely to the enlightenment of us all.