PMI soon to be deductible?

sweeps · #1 (**permalink**) 12-08-2006, 02:12 PM

Link

The legislation allows taxpayers who itemize their deductions to deduct premiums paid for mortgage insurance - which typically is required when home buyers purchase their homes with less than 20 percent down. Currently, only the interest paid on one's mortgage is deductible if the taxpayer itemizes deductions.

The new insurance premiums deduction will only apply to mortgage insurance contracts issued in 2007 and is only available to taxpayers whose adjusted gross incomes do not exceed $110,000 ($55,000 for married taxpayers filing separately).

markio26 · #2 (**permalink**) 12-08-2006, 02:47 PM

wow! my son, is in the process of purchasing a home with 0 down...maybe he should wait a month to close the deal.. his chain of thought was to close on it this year and he could deduct it....i will email him this info.. thanks for posting this...

creditcardfree · #3 (**permalink**) 12-08-2006, 03:16 PM

It would have been nice to have this in the past when I actually paid PMI. I wouldn't go back just for a tax deduction though.

disneysteve · #4 (**permalink**) 12-08-2006, 04:24 PM

Am I the only one who sees this as a bad idea? Years ago, a 20% downpayment was standard practice. As lenders gradually relaxed their lending guidelines and people, in general, seemingly forgot how to save up their money, we started seeing 10% or 5% or even 3% downpayments and PMI became much more common. Now people are doing 0% down and borrowing 100% of the price to avoid paying PMI. Making PMI deductible would seem to me to be encouraging more people to buy houses with less money down. PMI will be less of a concern since it will be deductible, lessening the financial impact of having to pay it.

I'd much rather see the government taking steps to tighten up the lending laws and stop making it so easy for people to buy homes they truly can't afford.

Does that make sense or am I looking at this wrong?

jmjj215 · #5 (**permalink**) 12-09-2006, 07:00 AM

I agree Steve. Now we're going to have to start hearing unenlighted people telling other people to not pay off their mortgage to avoid PMI because it's deductible and you wouldn't want to lose that deduction! [sarcasm intended].

The funny thing is, those people with AGI < 110,000 are exactly the types that should probably be more conservative in their housing purchases.

creditcardfree · #6 (**permalink**) 12-09-2006, 08:19 AM

Steve I agree as well. And Jesse I love your sarcasm!! This deduction has been proposed several times in the past, but I don't think it has ever gotten this far.

ren · #7 (**permalink**) 12-10-2006, 01:20 AM

Between this and the story I heard on the radio about the FHA trying to reduce the downpayment requirement (currently 3%)... Man, they've just given up on the old 20% rule entirely. Maybe I should skip that whole pesky saving a downpayment thing and get myself a 100% loan tomorrow! /sarcasm

#8 (**permalink**) 12-10-2006, 05:21 AM

Wow, save me a place up there in the high clouds so maybe someday I can take my place alongside this enviable group of champagne and caviar devourers.

As a single person with a moderate income, collecting a $20,000 downpayment for a very modest ~$100,000 home (while preserving my emergency fund and maintaining my retirement) has proven to be quite the challenge. I am probably looking at PMI and would have no problem with a deduction.

Although my tax situation is so simple, it's unlikely that even the mortgage interest and the PMI together will outstrip the standard deduction and therefore be of any use to me, I still don't have a problem with it.

So come on folks, lets let the little guy have some cheese.

Could it in part lead to people purchasing more than they should? Well, it's not like there aren't things out there causing that already and in much greater amounts (interest only, hybrids, etc.)

Now let's increase the floor of that saver's tax credit so we can all complain about how it's caused a mass exodus of money out of the consumption markets and damaged your portfolios!

disneysteve · #9 (**permalink**) 12-10-2006, 08:10 AM

Quote:

Originally Posted by rexdart

Could it in part lead to people purchasing more than they should? Well, it's not like there aren't things out there causing that already and in much greater amounts (interest only, hybrids, etc.)

That was my point exactly. With lax lending laws, almost predatory lending in some cases, do we really need another thing pushing people to buy homes they can't afford? The people who suffer most are the people who can least afford it.

My mother's home is currently under contract to be sold. The buyer is preapproved for a mortgage at 9.4%. The purchase price is 4 times his income. I ran his numbers though a mortgage calculator at bankrate.com and it confirmed what I thought initially. He can't afford the house. The calculator said he could afford a home for a little over 92K, and yet he is preapproved to buy one for 132K (and that was without me knowing if he has any other debt - car payment, credit cards, etc). Will a little deduction on the PMI really make any difference? I don't think so. It will just make it slightly less unaffordable. For my mother's sake, I hope the deal goes through, but the reality is that this guy has no business buying the house.

So while I'm sipping my diet Coke and munching my Oreo's (sorry, I'm not a champagne and caviar kind of guy), I continue to think this isn't such a good idea. The unfortunate reality is that not everyone can afford to buy a house given their current circumstances.

kv968 · #10 (**permalink**) 12-10-2006, 10:36 AM

I agree that this could be yet just another thing to push people to buy a house they can't afford, but how about the people who don't have the entire 20% for downpayment but can afford the payments? When we bought our house (years ago and unfortuanetly gone due to a divorce) we had only about 12% down and managed the payments quite handily. A tax deduction on that PMI would have been quite welcomed. I know there are people WAY over their head with their mortgages and there will be more with or without the lenders making it more accomodating. People have to stop and realize their own situation and deal with it. I know it's not easy with some realtors and banks driving it in their heads that they can "afford more", but the bottom line is that the people themselves have to draw the line as to what they can and can't afford. I'm not endorsing the notion of not saving anything at all and attempting to float a 100% mortgage either. However I think for some, if not most, of us, the 20% downpayment is going the way of the "stay-at-home mom" and the one-income family. It's out there, but not very prevelant.

#11 (**permalink**) 12-10-2006, 11:18 AM

Steve I understand what you're saying, I just don't agree with it. A PMI deduction doesn't allow me to buy more than I can afford, someone still has to give me the money for the home and I still have to actually pay the PMI each month.

It's the funny little financing out there that lets people physically buy more than they can afford.

"Your payment is only $450 a month on this $120,000 house (for a couple years...shhh)" will make someone do a stupid thing.

"You get a tax deduction on $540 worth of PMI at the end of the year" seems to me likely to fly under the radar for most people.

I think what I'm trying to articulate is that if they were smart enough not to buy into "creative financing," I find it difficult to see them swayed into stupidity by something as ethereal as a (small) tax deduction.

Again, probably not even an issue for me either way so I'll just hush.

disneysteve · #12 (**permalink**) 12-10-2006, 01:34 PM

Quote:

Originally Posted by rexdart

I think what I'm trying to articulate is that if they were smart enough not to buy into "creative financing," I find it difficult to see them swayed into stupidity by something as ethereal as a (small) tax deduction.

I'd agree with you there. I guess what I'm picturing is that salesman using the deductibility of the PMI as one more way to rope people in to taking on a loan they probably shouldn't be taking.

I think you and I probably agree on the basic issue here.

Diolla · #13 (**permalink**) 12-10-2006, 02:48 PM

Deductibility has always been a moot point for me, I keep all these records every year, medical, charity, interest and then end up using the standard deduction. I just know that the first year I don't keep them I will need them.

disneysteve · #14 (**permalink**) 12-10-2006, 04:41 PM

Quote:

Originally Posted by kv968

how about the people who don't have the entire 20% for downpayment but can afford the payments? When we bought our house (years ago and unfortuanetly gone due to a divorce) we had only about 12% down and managed the payments quite handily. A tax deduction on that PMI would have been quite welcomed.

In that situation, certainly a deduction is better than no deduction. But I think that situation is increasingly less common.

Quote:

I think for some, if not most, of us, the 20% downpayment is going the way of the "stay-at-home mom" and the one-income family. It's out there, but not very prevelant.

True, but that's a bad thing, not a good thing. I think making the PMI deductible might make people even less likely to bother trying to save up a decent downpayment before buying.

kv968 · #15 (**permalink**) 12-10-2006, 05:07 PM

I know that's a bad thing but unfortunately it's true. I don't know how much a tax write-off on a PMI would entice buyers not to save more (I honestly don't think very much as "rexdart" stated in his reply). However I do know that there comes a point when you save and save and you just can't reach that 20% and have to take the leap. In those instances every little thing you can write-off would help.

ren · #16 (**permalink**) 12-10-2006, 05:12 PM

Rex, I'm in the same boat as you, but in a more expensive market (starters around here run $250,000). I still think it's a bad idea.

1. As Steve said, it makes for less incentive to pay down their mortages. After all, you don't want to lose that deduction!
2. People should have some 'skin' in the game. The whole reason PMI exists is that people with less than 20% down are riskier bets. I don't think there's any need to encourage people to be riskier with their money in this country. And this applies more to the FHA 3% thing, but if someone can't save up at least a token downpayment, are they really ready to own? What's going to happen when the house needs a new roof?
3. On the grand scale, our government already spends more than it takes in. At some point, either we have to spend less or tax more. Until the deficit is under control, I really don't want to hear politicians finding clever new ways to take in less money in the name of helping people now while screwing the future. Homeowners are already rewarded with the interest deduction. Enough already.

kv968 · #17 (**permalink**) 12-10-2006, 05:45 PM

Quote:

Originally Posted by ren

1. As Steve said, it makes for less incentive to pay down their mortages. After all, you don't want to lose that deduction!

I doubt think a tax deduction would encourage people to not pay down their mortgage when by doing so they can get rid of the sustantial PMI they're currently paying.

disneysteve · #18 (**permalink**) 12-10-2006, 07:07 PM

Quote:

Originally Posted by kv968

I doubt think a tax deduction would encourage people to not pay down their mortgage when by doing so they can get rid of the sustantial PMI they're currently paying.

Many people avoid paying down their mortgage to keep the tax deduction despite all logic to the contrary about how much that deduction is actually costing them. It makes no sense, but lots of people aren't so good at math.

sweeps · #19 (**permalink**) 12-10-2006, 07:54 PM

Obviously no one should keep a mortgage just because you're getting a tax deduction. BUT the tax deduction should be a consideration when deciding whether to pay extra on the mortgage or pay extra on other debts or invest at a higher rate of return.

If someone is against making PMI deductible, then they should also be against having any amount of mortgage/HEL/HELOC above the 80% line not deductible as well.

disneysteve · #20 (**permalink**) 12-10-2006, 08:15 PM

Quote:

Originally Posted by Sweepsplayer

Obviously no one should keep a mortgage just because you're getting a tax deduction. BUT the tax deduction should be a consideration when deciding whether to pay extra on the mortgage or pay extra on other debts or invest at a higher rate of return.

True.

Quote:

If someone is against making PMI deductible, then they should also be against having any amount of mortgage/HEL/HELOC above the 80% line not deductible as well.

Interesting suggestion. I'll have to think about that, but off the top of my head, I'm not sure I agree. I think those are two different things. Let's say I own my home outright - no mortgage. I want to build a huge addition, so I take a HEL for 90% of the home's value. I'm not sure how to compare that situation to someone paying PMI becaue they didn't have a large enough downpayment when buying the home. The two scenarios aren't really related in any way. Are they?