Question

Explain the mortgage insurance premium. What is it, how does it come into existence and when does it cease? Also, must discuss all limits on deducting this expense.

Answer 1

If someone is buying a home/property and only making a down payment of less than 20% then the Mortgage Insurance comes into effect as the lender requires this to secure his lending of 80% of the property value. Now the borrower pays the premium of that Mortgage Insurance until he/she has accumulated enough equity in the home that the lender no longer considers them high-risk.

Mortgage Insurance Premium (MIP/PMI) cost is around 0.10% to 6% of the loan balance per year, depending upon the amount of down payment made, Loan term, Loan amount, credit score of the borrower. A lender may also require you to pay for PMI if you refinance with less than 20% equity in your home.

Borrowers can request that monthly mortgage insurance payments be eliminated once the loan-to-value ratio drops below 80%. Once the mortgage's LTV ratio drops to 78% – meaning your down payment, plus the loan principal you’ve paid off, equals 22% of the home’s purchase price – the lender must automatically cancel PMI as required by the federal Homeowners Protection Act, even if your home’s market value has gone down (as long as you’re current on your mortgage)

The length of time you have to carry PMI also depends on the type of PMI you choose, Mortgage Insurance has four types; Borrower-Paid Mortgage Insurance, Single-Premium Mortgage Insurance, Lender-Paid Mortgage Insurance, and Split-Premium Mortgage Insurance.

Mortgage insurance premiums paid during the year are reported on Form 1098. You should receive this form from your lender after the close of the tax year. You can find the amount you paid in premiums in box 4. There’s currently no limit on the amount of the deduction you can claim if you and your loan qualify. You can deduct this entire amount.

Mortgage insurance premiums are itemized tax deductions. They're reported on line 13 of Schedule A, "Interest You Paid." You can’t claim the mortgage insurance premiums deduction if you claim the standard deduction—you must itemize using Schedule A.