203k Loan and Renovation Financing

Pic Credit to Arvind Balaraman

PMI, also known as private mortgage insurance, is that pesky insurance that homeowners have to pay that protects the lender whether or not you are refinancing or buying a home and your first mortgage is greater than 80% of the appraised value.

For the better part of the last 10 years borrowers selected the first and second mortgage combination to finance their loan balances since the interest paid on the second mortgage could qualify as a tax deduction whereas PMI wasn’t deductible.

However, this is no longer true and hasn’t been since December 31st, 2006.  At first the tax break was to sunset December 31st, 2007, than it got extended through December 31st, 2010 and again it’s been extended through December 31st, 2011. The tax deduction isn’t available to all PMI insurance paying borrowers, there are income limitations.

Qualifying for the full deduction, would require a couple or a single taxpayer to have AGI of $100,000 or less and no more than $109,00 to get a partial deduction. A married individual who files separately must have AGI of $50,000 for the full deduction, or no more than $54,500 for a partial deduction.

In our existing lending environment PMI now plays a larger role since the second mortgage/HELOC market has contracted.  I have recently seen refinance borrowers, who want to take advantage of the low mortgage rates have to pay PMI on their new loan even though their previous loan(s) didn’t have PMI.  Why?  Low appraisals.  If the new loan is more than 80% of the appraised value, PMI is required.  Sometimes it makes sense to pay the PMI on a refinance, sometimes it doesn’t.

Turbo Tax states that the “typical” homeowner may realize a $350.00 tax deduction if they meet the income requirements as mentioned above. Typical is a rather general term but as long as the PMI or private mortgage insurance payer income falls under the income guidelines as noted above, they may be eligible for the tax deduction.

It’s important for current homeowners and future 203k loan applicants to know that FHA mortgage insurance is also eligible for the tax deduction.  PMI, private mortgage insurance, and FHA mortgage insurance both cover lender interests but are used in different loan scenarios.  FHA mortgage insurance is used in conjunction with FHA loans which includes the 203k.  PMI is used in conjunction with non-FHA loans such as conventional.

Will the PMI tax deduction carry over to 2012 and beyond?  Only time will tell and as usual as long as the government is making the decision, we won’t find out until December 31^st of 2011.

Best KW