Warn Your Clients PMI Deductions May End in 2014

For buyers who purchased a home with less than 20 percent down and had to pay private mortgage insurance, those PMI premiums in 2013 are probably deductible but might not be in 2014.

PMI premiums run about $50 per month for every $100,000 of financing. For a $500,000 loan, you’ll pay about $250 per month for PMI. These payments are made along with your loan payments.

PMI premiums have been deductible as a personal itemized deduction since 2007. But you must itemize your deductions to take the PMI deduction. If, for example, you pay $250 per month for PMI, you’ll have an additional $3,000 in personal itemized deductions. If you’re in the 25 percent tax bracket, this will save you $750 in federal income tax.

The PMI deduction is available only for home loans entered into during 2007 through 2013. Currently, the deduction is scheduled to terminate on Jan. 1, 2014.

The good news is that you don’t have to pay PMI premiums forever. Once you build up a specified amount of equity in your home, the need for PMI ends. The Homeowners Protection Act of 1998 requires your lender to automatically cancel your PMI once your equity equals 22 percent of your home’s original appraised value.

However, you don’t necessarily have to wait this long. You can request that your lender voluntarily cancel your PMI once your equity reaches 20 percent of your home’s current market value. For example, if you own a home with a fair market value of $500,000, you can request that the lender cancel your PMI once you’ve paid down $100,000 of your loan principal. Your lender isn’t required to grant your request, but you’ll bolster your case if you have a good payment history.

The Mortgage Insurance Companies of America estimates that 90 percent of homeowners stop paying PMI premiums within five years.

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