Private mortgage insurance is an insurance policy that protects your lender against loss in the event you default on your home loan. You might wonder why you should pay for an insurance policy that benefits your mortgage company, and the answer is that your mortgage company might not have approved your loan without it. On the up side, the IRS considered PMI payments as part of your deductible mortgage interest, at least through the end of 2011.
Private Mortgage Insurance
Conventional mortgages typically require a 20 percent down payment -- if you can pay that much, lenders are fairly confident that they can recoup the 80 percent they loaned you in the event you default. The average price of a new home in 2010 was $272,900 according to the U.S. Census Bureau. Because not everyone can come up with an average 20 percent down payment of $54,580, private mortgage insurance -- which will pay the lender for its losses if you default -- provides an incentive for mortgage lenders to make loans to home buyers who can't come up with the full 20 percent. You can usually cancel your PMI policy once the equity in your home reaches 20 percent of the original purchase price.
You might be able to include the cost of your private mortgage insurance premiums with your mortgage interest deduction if Congress renews this tax benefit for 2012, but in the past, there have been a number of conditions. The deduction was reduced if your adjusted gross income exceeded $100,000 for the 2011 tax year, and eliminated if your AGI was more than $109,000. You must have taken out the mortgage insurance policy after the 2006 tax year, and the policy must have covered home acquisition debt. If you paid your premiums in advance, you can only deduct the amount of your mortgage insurance premium that was allocated to the current tax year.
The private mortgage insurance tax deduction expired at the end of the 2011 tax year, along with at least 50 other tax breaks, although at the time of publication it's possible that Congress will vote to extend it for 2012 and subsequent years.
PMI Vs. Homeowners Insurance
You should not confuse private mortgage insurance with your homeowners insurance policy. Your homeowners policy protects you against the loss of your home and personal possessions, and provides personal liability coverage. You can't deduct any part of your homeowners insurance premiums. While you can cancel your private mortgage insurance once you attain sufficient equity in your home, you should continue to carry homeowners insurance regardless of whether you have a mortgage or you own your home free and clear.
- IRS: Publication 936, Mortgage Insurance Premiums
- IRS: Qualified Mortgage Insurance Premiums
- Federal Reserve Bank of San Francisco: Private Mortgage Insurance (PMI)
- TD Insurance: What Is In a Standard Homeowners Insurance Policy?
- Census Bureau: Median and Average Sales Prices of New Homes Sold in United States
- tax forms image by Chad McDermott from Fotolia.com