With the tax deadline fast approaching many recent  home buyers may not be aware that premiums for private mortgage insurance(PMI) paid in 2007 are tax deductible as mortgage interest.  It was included as a provision in the Tax Relief and Health Care Act of 2006.

Banks would normally require home buyers to purchase private mortgage insurance, when they have less than a 20% for an initial down payment.  The tax change was primarily approved as a way to help out mortgage insurance companies, who were losing out on business because it was cheaper for most people to take out piggyback loans.

People were avoiding the PMI by basically taking out two mortgages, one for 80% and another for the remainder.  Since the interest payments for both mortgages were tax deductible, it was usually a cheaper alternative to the PMI which could be quite expensive depending of the credit rating of the borrower and the amount of the initial down payment.

After the changes took effect the purchase of PMI became viable again because the piggy backed mortgage would normally have a much higher interest rate than the primary mortgage.  Although housing prices have fallen sharply many families are still unable to afford the regular 20% down mortgage so the tax changes benefits a significant number of lower income households.

Unfortunately anyone that purchased a home prior to 2007 won’t qualify for the deduction unless they had refinanced their mortgage last year.  Also, only those households with an adjusted gross income of $100,000 or less qualify for the full deduction.

While the tax break was initially to last only a year the deduction was extended for three more years in the Mortgage Forgiveness Debt Relief Act of 2007.