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June, 2003 Tax Tip

When Can You Stop Paying Private Mortgage Insurance ("PMI")?

If you make a down payment of less than 20% when buying a home, the lender will generally require you to buy private mortgage insurance (PMI).  The PMI, which can be a costly proposition, is added to your mortgage payments.  Depending upon the lender, you can generally drop the PMI once you attain a 20% (some lenders may require up to 25%) equity in your home either through principal payments or by increase in value of your home.  Other lenders may require you to keep the PMI forever and others make you keep it at least five years.  Some states may have laws requiring that PMI be dropped once a given percentage of equity is reached.

Don't expect the lender to automatically drop the PMI once you attain the requisite equity.  Monitor your equity and, when you have reached 20%, write to your mortgage servicing company and request that the payment be stopped.  This will get the process started. You may be required to pay for an appraisal, and you will need to have a good payment record.  If you are able to cancel the insurance, you will receive any prepaid premiums that are in your escrow account.  If the lender fails to cooperate, consider refinancing with a lender who will not impose the payment.

Even though a plausible argument can be made that PMI has most, if not all, of the attributes of being akin to interest, the IRS has taken the position that PMI is not deductible as it considers the premiums to be loan-related "service" expenditures, rather than an integral part of the cost of money itself.

It should be noted that a proposed provision in the new tax law (Jobs and Growth Tax Relief Act of 2003) that would have allowed homeowners to deduct PMI did not get enacted.

 



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