Laura explains what private mortgage insurance (PMI) is and how to avoid paying it. Find out your rights for cutting this expense as quickly as possible so you reduce your mortgage payment and save more money.
Is Private Mortgage Insurance (PMI) Tax-Deductible?
One upside to PMI is that it’s a tax-deductible expense when you itemize deductions on Schedule A.
One upside to PMI is that it’s a tax-deductible expense when you itemize deductions on Schedule A. This applies to monthly premiums or PMI fees paid on conventional, FHA, or VA loans issued after 2006.
However, there’s an income restriction to qualify for the PMI deduction. Your adjusted gross income can’t exceed $109,000, or $54,500 if you’re married and file a separate tax return. How much PMI you paid during the year is listed on Form 1098, the annual statement you receive from your lender.
How to Get Rid of Private Mortgage Insurance (PMI)
I mentioned that it’s possible to get rid of PMI on a conventional mortgage. The rules lenders have to follow for canceling PMI are part of the Homeowner’s Protection Act (HPA) of 1998.
If you’re currently paying PMI, you should have received a document at closing with information about your rights for canceling it. You should also receive an annual notice reminding you that you can request cancelation under certain conditions.
There are three ways to cancel PMI:
- Request cancelation – after you pay down your mortgage balance to 80% of the original value of the property. You must pay the lender for an appraisal in order to prove that the current market value of your home isn’t lower than what you paid for it. The fee could range from $300 to $1,000, depending on the size and location of your home.
- Automatic termination – by the lender when your mortgage balance reaches 78% of the original value of the property. In this case, you don’t have to pay for an appraisal because even if your home value is lower than what you paid for it, the lender must still cancel your PMI.
- Final termination - happens at the midpoint of your loan when you have an interest-only product, have a balloon payment, or were given forbearance by your lender. For example, if you have a 30-year, interest-only mortgage, your lender must cancel your PMI after 15 years--even if you haven't paid it down to 78% of your home's original value.
However, be aware that your lender can deny your request for PMI cancelation under certain situations. You could be denied if you made late payments over the past two years, have a lien on the property, or have a high-risk loan over a certain amount.
You must be current on all monthly payments in order to have PMI cancelled either as a request, automatically, or with a final termination.
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