PMI is NOW Tax Deductible

[Sapiens]

http://www.raincityguide.com/2007/01...ax-deductible/

It’s taken a long time, but finally Private Mortgage Insurance (PMI) is tax deductible. A loan over 80% loan to value (less than 20% down payment) is required to have PMI unless the loan is split into a 1st and 2nd mortgage. Until recently, the additional cost of this insurance was not tax deductible. This is Great news, but proceed with caution…

Who says the FIRE industries do not have an effective lobbying machine in DC?

Let John Q. Public continue to pile on the debt.

[SeanO]

Re: PMI is NOW Tax Deductible

Sapiens,

I think this may actually be a good move for the public. Ideally everyone would have 20% down to buy a house, but that is no easy feat for a young family. So the current product of choice is an 80% first (to avoid PMI) and a high interest rate 2nd. With PMI you typically get a higher percentage first alone.

The advantage of PMI is that it is temporary. Usually after 2 years of payment history, or an increase in property value to the loan being 80% LTV, whichever comes first, PMI is removed. Not true with the 10-20% high interest 2nd... the only way most will remove that is to refinace it and the first.... but that's only possible if the property has increased enough in value to do so. And with all the refi fees, potentially higher rates, likelihood of pulling cash out, etc. it only makes a bad situation worse.

The reality is that this tax change just puts PMI on a more equal playing field. Let's face it the higher interest rate on the no-PMI 2nd is essentially risk insurance, and it is tax deductible. I think PMI is a more honest, and consumer friendly, way for people to pay this risk premium.

Now all that said, my personal preference would be that PMI, 2nds and home equity lines were all NOT tax deductible. That would be real incentive not to use your home as a piggy bank, AND to think very carefully about putting more down.

Sean

[Sapiens]

Re: PMI is NOW Tax Deductible

Now all that said, my personal preference would be that PMI, 2nds and home equity lines were all NOT tax deductible. That would be real incentive not to use your home as a piggy bank, AND to think carefully about not putting anything down.

Sean

Sean, I understand and I do benefit from people getting their PMI to be tax deductible. But at the rate we are going the masses are so overleveraged that they will default. EJ posted something to that effect here:

http://www.itulip.com/forums/showthr...=7454#post7454

The debt carried by the average household in the bottom 40% was about 15 times net worth in 2004, a modest improvement from nearly 20 times net worth in 1962. The average household in the middle 20% was 92% of net worth, up from 65% of net worth. Among the top 1%, debt remained constant at 4% of net worth.

The data also confirm what we see happening around us–a middle class becoming more more indebted and living one paycheck away from joining the bottom 40%, and the top 1% getting really rich.

...

Such broad disparities in net worth among groups within American society create a manageable level of social friction during flush economic times. However, in an economic crisis they are the foundation for political crisis. Markets which are un-free and thus unfair in the way of creating a large group of debt serfs by the imposition of economic rents on their labor can quickly become un-free and unfair in the other direction.

...

One thing you can be sure of is that the political process, with grossly uneven wealth and debt distribution as the backdrop, will be unpredictable.

[SeanO]

Re: PMI is NOW Tax Deductible

Sean, I understand and I do benefit from people getting their PMI to be tax deductible. But at the rate we are going the masses are so overleveraged that they will default.

I agree on the larger issue. I'm just trying to point out that, contrary to the appearance of your original post, the resurgence of PMI may actually be a sign that we are headed in a better direction then we've been for some time.

Sean

[Sapiens]

Re: PMI is NOW Tax Deductible

I agree on the larger issue. I'm just trying to point out that, contrary to the appearance of your original post, the resurgence of PMI may actually be a sign that we are headed in a better direction then we've been for some time.

Sean,

I tend to forget that sarcastic cynicism is not expressed well on the written medium.

I am in agreement with you on this:

Now all that said, my personal preference would be that PMI, 2nds and home equity lines were all NOT tax deductible. That would be real incentive not to use your home as a piggy bank, AND to think very carefully about putting more down.