PMI, or Private Mortgage Insurance is a policy provided by private mortgage insurers to protect lenders against loss. If you are making a down payment of less than 20 percent, you will most likely be required to get PMI. This guarantees that the lender will receive 80 percent of the loan, if you happen to default.
The insurance premium amount varies by the loan-to-value (a key risk factor that lenders use to assess if borrowers qualify for a home mortgage), and the type of loan. Generally, the initial premium is 1-5% of the mortgage total, and possibly an additional monthly fee.
Government backed loans, like FHA (Federal Housing Administration), technically do not have PMI. However each program carries an additional Insurance that protects the Lender against foreclosures. The FHA “PMI” increased on April 1, 2013 and now stands at one of the highest premiums charged on a mortgage loan.
California lenders prefer to keep their loan loss exposure to a maximum of 80 percent of the property’s value. In some cases, lenders will finance 100 percent or more of the value, but will require the percentage financed above 80 percent minus the down payment percentage to be privately insured.
Steps to Calculate PMI in California:
1) Contact your lender and request the insurance rate factor being used on your loan transaction, which ranges
between 0.25 percent and 2.0 percent of the coverage amount.
2) Review your estimated closing statement (HUD-1) and locate the property value and loan amount to determine
the coverage percentage you need to become insured.
3) Now, calculate the payment by multiplying the insurance rate coverage by the loan amount. Then divide the
annual results by 12. This will determine the estimated monthly payment amount.
What amount of PMI do you claim?
It is possible to use PMI payments as a tax deduction when filing your returns. This tax deduction was created as part of the Tax Relief and Health Care Act of 2006, with an extension now in effect for premiums paid through 2013.
You should find the amount in box 4 of the Form 1098 (or the substitute year-end loan information statement) that your lender sent you.
You will need to meet a few requirements in order to utilize the PMI deductions:
First, make a note of when you paid the mortgage insurance. The deduction is allowed only if you took out the mortgage for which you pay a PMI, on or after January 1, 2007. If you have refinanced your home since January 1, 2007, you can also qualify for the PMI deduction.
There is no statutory limit on the amount of PMI premiums you can deduct, the amount might be reduced based on your income. The deduction starts to phase out when the homeowner’s adjusted gross income, or AGI, is greater than $100,000. The phaseout begins at $50,000 AGI for married persons filing separate returns.
The Schedule A instructions include a work sheet, as well as most tax preparation software, which homeowners can use in determining their reduced PMI deduction amount.