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Archive for Friday, January 26, 2007

Some PMI payments qualify as deductions

January 26, 2007

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A new law allows some homeowners to deduct their annual payments for private mortgage insurance.

Q: My friend says that a new law allows some homeowners to take a tax deduction for payments on their private mortgage insurance. I haven't heard about this before. Can you help?

A: Sure. After years of wrangling, Congress finally passed a law that took effect Jan. 1 allowing some (not all) homeowners to deduct at least a portion of their payments for private mortgage insurance. Whether you're among those who now can take the deduction will depend largely on how much you earn and when you bought the private mortgage insurance policy, rather than how much you pay each year for the insurance or how much your house is worth.

Millions of Americans have private mortgage insurance, commonly called PMI. Lenders often require borrowers to purchase PMI if the down payment is less than 20 percent of the home's purchase price: The policies reimburse a bank for its losses if, for example, a low-down-payment buyer defaults on the loan and the resulting foreclosure sale doesn't bring in enough cash to cover the outstanding debt and the bank's legal fees.

Many consumer organizations, as well as a half-dozen real estate and banking trade groups, have spent the past several years trying to persuade Congress to allow buyers to deduct their PMI payments.

Allowing such deductions would make it easier for millions of people to buy a home, and then help them save money after they move in by boosting their annual write-offs.

The new bill was signed into law by President Bush in late December. It allows consumers who purchase a PMI policy during 2007 to deduct their premiums, regardless of whether the policy is obtained to buy a home or to refinance an existing loan. The write-offs can be taken when they complete their returns in the spring of 2008.

It may seem unfair, but people who acquired their mortgage insurance in 2006 or earlier won't be able to deduct the cost of their policy unless they replace it with a new plan this year.

Still, the freshly minted law is expected to help boost the write-offs of about 1 million PMI buyers when they fill out their 2007 tax returns a year from now - but with some important caveats.

First, the deductions are reduced gradually for married tax-filers whose adjusted gross income this year tops $100,000. Those who earn more than $110,000 won't get to take any PMI write-offs at all.

It's also important to note that the new law currently has only a one-year life span: The deduction will disappear entirely in 2008 unless Congress extends it. But many real estate lobbyists on Capitol Hill are confident that the deduction will indeed be renewed, and could even be expanded to provide the same write-offs to borrowers who purchased their PMI policy before this year.

Q: The bank that issued our mortgage three years ago has been purchased by another bank. Can the new bank change the interest rate on our fixed-rate loan?

A: No, the new financial institution that purchased your original mortgage lender cannot change the terms of your current home loan. Federal law permits the new bank to change the mailing address of your future payments, but it would be illegal for the bank to alter the interest rate on your mortgage.

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