What is PMI? Can I get rid of the PMI on my loan?

PMI or Private Mortgage Insurance is normally required when you buy a house with less than 20% down. Mortgage insurance is a type of guarantee that helps protect lenders against the costs of foreclosure. Private mortgage-insurance companies provide this insurance protection. It enables lenders to accept lower down payments than they would normally accept. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. Therefore, without mortgage insurance, you might not be able to buy a home without a 20% down payment.

The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment.

The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it.

To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of canceling the PMI on your loan is to refinance and to get a new loan without PMI.

PMI may be tax deductible

Federal government allows tax break for private mortgage insurance.

If you obtain a new home loan with private mortgage insurance in 2007, you might be able to deduct the cost of the insurance on your 2007 federal income tax return. The rules are just as complicated as most other tax laws, so you should consult a qualified tax professional for guidance on your individual situation.

Who benefits from tax deduction?
If you and your spouse file a joint tax return and have adjusted gross income (AGI) of no more than $100,000 or if you file an individual tax return and have AGI of no more than $50,000, you may be able to deduct 100 percent of the PMI you paid in 2007. You'll need to itemize your tax deductions to take advantage of this benefit.

There is no cap on the amount of paid PMI that you can deduct; however, the deduction is reduced by 10 percent for each additional $1,000 of AGI. That means if you and your spouse file a joint tax return and have AGI of $100,000 to $110,000 or if you file an individual return and have AGI of $50,000 to $55,000, you may be able to take a partial deduction.

The deduction is allowed for both purchase-money and refinance mortgages, but there is a gray area as to whether PMI paid for the cash-out portion of a refinance would be deductible. If you obtain a refinance loan with cash out and PMI in 2007, you'll need to consult a tax professional for advice.

Your lender or loan servicer might report the annual amount of PMI you paid to you on the same year-end form that's used to report annual mortgage interest or another form. This report is required only if the total PMI is more than $600.

 Rethink piggyback or PMI equation
The PMI deduction is allowed only for mortgages that close between Jan. 1 and Dec. 31, 2007, and is effective only for the 2007 tax year, unless the federal government renews the law for subsequent years.

This limited duration complicates the question of whether a single mortgage with PMI may be more preferable than two mortgages in a "piggyback" structure.

If the PMI deduction isn't extended, you may still benefit from the two-loan option, or if you want to bank on the odds that the deduction will be extended, you may want to factor that expectation into your decision.

Either way, individual circumstances such as how long you plan to keep your mortgage and own your home, your ability to qualify for two loans, the purpose and type of your second loan, and your personal tolerance for risk, among other factors, may be more important than the tax benefit of the PMI deduction. Be sure to weigh all of the relevant factors before you make your decision.