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It's not interest, but you can deduct it anyway

Private mortgage insurance protects lender, but at least it's deductible.

By Jeff Schnepper Mar 5, 2010 12:01PM

Only our mendicant mandarins of madness in Congress could use the Tax Code to define insurance premiums as interest. But, I’m not one to challenge any construction that reduces my taxes.

 

I’m talking about mortgage insurance premiums (MIP). When you borrow money to buy a house, your lender is going to want you to have significant skin in the game. If you’re borrowing more than 80% of the value of the property, the mortgage company has an increased risk. To cover that increased risk, the lender will normally require you to purchase private mortgage insurance (PMI).

 

Don’t you just love it? You buy and pay for insurance to cover your lender’s risk. I thought that’s what “interest” was for?

I guess that’s why the private mortgage insurance premiums you pay are deducted on Schedule A under “interest.”

 

You need to itemize your deductions to get this one.

 

The policy must have been issued after 2006 and, unless the law is changed, 2010 is the last year to claim this deduction.

The benefit phases out as your income (technically your adjusted gross income) goes from $50,000 to $55,000 ($100,000 to $110,000 for those who file joint returns).

 

If you prepay the full lifetime of the mortgage premium, the insurance premium is still treated as interest and allowed ratably over the shorter of 84 months or the term of the loan.

 

While deductions are good, not having the expense is always better. Keep an eye on both the changing value of your property, and the amount of principal that you’ve paid back. If your loan to value ratio falls below 80%, contact your lender and request the payments be discontinued. It’s more money in your pockets.

 

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