Mortgage insurance, sometimes referred to as private mortgage insurance, or PMI, is an insurance policy that many lenders require on mortgages when the borrower puts less than 20 percent down. This type of insurance protects the lender in the event of a default by the borrower. In certain instances, you can treat mortgage insurance as mortgage interest and deduct it from your federal income taxes.
Conventional home mortgages typically require a 20 percent down payment. With the average price of a new home hovering at more than $270,000 as of 2010, it can be a challenge for the average wage-earner to come up with that kind of up-front money. By reducing the risk to lenders, mortgage insurance encourages lenders to provide home mortgages to borrowers with a lower down payment, or in some cases, no down payment at all. Mortgage insurance must usually remain in effect until the borrower has built up at least 20 percent equity in her home. It's important to remember that mortgage insurance does not protect the homeowner against anything. It only protects the mortgage company against default on the home mortgage.
What It Is Not
Mortgage insurance should not be confused with mortgage life insurance or mortgage protection insurance. Mortgage life insurance is a term life insurance policy that pays off the mortgage in the event of the death of the policyholder. Mortgage protection insurance pays the mortgage payment during periods when the policyholder becomes disabled or incapacitated, and sometimes if the policyholder loses her job.
Mortgage insurance should also not be confused with homeowner's insurance. Homeowner's insurance protects the policyholder against loss due to certain occurrences such as fire, storms, hail and theft. It may also provide liability insurance in the event of an injury that occurs on your property.
Mortgage insurance may be deductible from your federal income taxes under certain circumstances. According to the Internal Revenue Service, qualified mortgage insurance premiums paid in 2009 on policies that were issued after 2006 may be treated as home mortgage interest and deducted on IRS Form 1040, Schedule A, line 13. Qualified mortgage insurance includes private mortgage insurance as well as mortgage insurance programs offered through the Rural Housing Service, the Department of Veterans Affairs or the Federal Housing Administration. Mortgage insurance may be known by different names, such as a guarantee fee or a funding fee, depending on the providing organization.
Not everyone is able to fully deduct mortgage insurance premiums. If you're married and filing a joint return and your adjusted gross income, or AGI, is more than $100,000, your deduction for mortgage insurance premiums will be reduced. Taxpayers who report more than $109,000 in adjusted gross income are not able to claim any deduction for mortgage insurance premiums. Different AGI ranges may apply based on your filing status. Tax deductions for home mortgage insurance premiums are set to expire after 2010 unless Congress extends them.
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