You’ve probably been warned that if you don’t have 20% to put down on a house, you’ll be stuck paying private mortgage insurance or “PMI.” (On a government loan, it’s just mortgage insurance, or MI.) A financial advisor or relative might intone the acronym with a deep warning sound, as if it’s the worst thing to ever happen. But many homeowners consider it to be worth the trade-off of owning their own home. Still, you might wonder if you get anything out of PMI, or if it will help you with your taxes? Is PMI tax deductible?

If saving up a larger down payment would take several more years, and you’re ready to buy now, you’re probably looking for a silver lining in paying PMI. According to Nicole Rosandich Meeker, a senior mortgage consultant at Wintrust Mortgage, there are programs where you won’t pay for PMI directly every month, but instead you’ll see an increased interest rate and the lender then pays the mortgage insurance (known as “lender paid mortgage insurance”).

Read on for answers to your questions about PMI and taxes.

What is MI or PMI?

It’s not easy for many people to come up with a 20% down payment, especially in areas with high housing values. This is why programs exist to help buyers get into a house for as little as a 3% down. But since a lower down payment represents more risk to the lender, the lender often requires that you purchase mortgage insurance to mitigate their risk.

If you defaulted on your mortgage, mortgage insurance would help protect the lender from financial loss. With a lower down payment, they’re lending more money, and you have less equity in the house. If home values were to suddenly slide, and you defaulted on your mortgage loan, they could end up with a higher mortgage balance due than the home is currently worth. By collecting MI premiums when you pay your mortgage, the lender is creating a backup plan so that they can file an insurance claim if this actually does happen.

So what’s the difference between MI and PMI? It depends on the type of loan you get. MI is just an abbreviation of mortgage insurance, and the term can be applied generally to all discussions of mortgage insurance, or specifically to government-backed loans like those offered by FHA.

Contrast that with PMI, which is private mortgage insurance. So if you get a conventional loan — which is any mortgage that’s not part of a government program — you’ll likely have to get private mortgage insurance or PMI.

The history of the deduction

Whether or not MI or PMI are tax deductible has changed several times over the years, leading to some confusion. Back in 2006, the Tax Relief and Health Care Act allowed borrowers to deduct their mortgage insurance premiums on their taxes.

This act expired in 2015 but was extended for one year to 2016, then again in 2017. But that was it for homeowners until the Further Consolidated Appropriations Act introduced in March 2019 and signed into law in December 2019. That act extended the mortgage insurance premium deduction through the end of this year, 2020.

Who can take the deduction?

Like any tax deduction, there are restrictions on who can take it.

To be eligible, you must have bought your house after January 1, 2007, and put down less than 20% on it. If you’re still paying mortgage insurance premiums, they’re deductible.

Should you take the deduction?

A lot of individual facts will impact your taxes, so it’s a good idea to talk to a professional before making a final decision about deductions. However, some general guidelines do apply.

Are you itemizing or taking the standard tax deduction?

Whether or not you deduct MI depends on whether you are itemizing or taking the standard deduction on your taxes.

When MI first became deductible, the standard deduction for single taxpayers was $5,450; for married taxpayers filing jointly it was $10,300. For many people, it made more sense to itemize with a lower standard deduction, as it was easier to exceed this limit.

Now, the standard deduction in 2020 is $12,400 for single taxpayers and $24,800 for married taxpayers filing jointly; it increased significantly in 2018 when the Tax Cuts and Jobs Act was passed.

This means you would have to accrue more than $12,400 as an individual or $24,800 as a couple in itemized deductions in order for itemizing to make sense. In that case, you might want to include MI on your itemized deduction schedule.

How much money do you make?

Whether or not you itemize your deductions and include MI payments also depends on how much money you make. If your adjusted gross income is more than $100,000, or $50,000 if you’re married and filing separately, then your mortgage insurance deduction will be reduced by 10% for every $1,000 over the limit that you earned.

If your adjusted gross income is more than $109,000, or $54,500 if you’re married and filing separately, you won’t qualify for the deduction.

Should you still be paying MI?

Before you talk to a tax professional, take the time to look at housing values in your area. Between 1967 and 2020, according to the Consumer Price Index, housing prices had an inflation rate of 4.18% per year. If you bought a house prior to 2007, between price appreciation and your monthly premium payments, it’s almost certain that you have more equity in it today.

What does this mean? The PMI or MI you’ve been paying on the home potentially should have rolled off by now. According to Phil Ganz, a senior loan officer in the Boston area, “buyers can get rid of the PMI when they have 20% equity,” but many don’t “because borrowers don’t realize that there’s inflation impacting the home’s value.”

Once you reach 20% equity in the house, mortgage insurance is no longer necessary. However, the lender and the insurer will only calculate your outstanding equity based on the original value of the home when your loan closed. They are under no obligation to track any appreciation in your property’s value and remove the MI premium payments based on increased value.

This is why it may be in your interest to get your home reassessed to determine its current value.  Talk to a local agent to get an accurate assessment of your home’s current value, then contact your lender and insurer and ask about the process for having your MI removed.

What if you’re a new homebuyer?

If you’re buying a house now, you’re probably focused on ways to keep your monthly payment affordable. Since MI is an additional expense that may not always be tax deductible, you might think it’s money down the drain. But paying mortgage insurance shouldn’t scare you out of buying a house.

Within a few years, you could reach that sweet spot between value appreciation and paying down the principal where you have 20% equity in your house. During that time, you’re also getting to live in a place you own, enjoying the space and making improvements that increase its value. You can deduct your mortgage interest, unlike rent, and your home is probably larger than an apartment.

On the average American home, mortgage insurance costs between 0.5% to 1% of the loan amount each year, which is hardly large enough to stand in the way of realizing the dream of homeownership. Especially when you compare the cost of mortgage insurance to the potential inflation in a home’s value each year.

Instead of letting it intimidate you, talk to a mortgage broker and an agent about how much MI or PMI would realistically add to your monthly payment. Also ask how quickly home values are rising in your area to determine when it might roll off.

Is PMI tax deductible? It depends, but instead of worrying about its cost, focus instead on the joy of living in the home it helps you afford.