What to choose - Tax Advantage Mortgage Insurance or private mortgage insurance (PMI)?


How to decide what is best for you - a tax deductible Tax Advantage Mortgage Insurance, or a simple PMI?

Every lender will require PMI for loans with LTV higher than 80%. However, some will accept a higher rate instead. Should you take it?

Basically, taking a higher rate results in greater tax deductions while PMI is not tax deductible for households with income over $109,000 who took a loan prior to 2007. And even if PMI is tax deductible for low to moderate income families, for many homebuyers it is not.

However, PMI can be cancelled according to the law when the LTV goes down to 80%, or lower while the higher rate has to be carried through the life of the loan, or until the loan reaches 80% LTV and is refinanced to a new loan without PMI.

Use a calculator when comparing tax advantage mortgage insurance vs private mortgage insurance costs.

One cannot make a decision knowing the rate - the rate of a Tax Advantage Mortgage Insurance loan can be up to 1% higher than on a loan with PMI.

Even if calculations are complex to figure out if getting a Tax Advantage Mortgage Insurance plan is better than a mortgage with PMI, here are some of the basics:

  • Taking a higher rate instead of a PMI is relatively better if you plan to stay in the house for a short time.
  • The lower the tax bracket, the better it is to take PMI instead Tax Advantage Mortgage Insurance.
  • The lower the interest rate increase of the Tax Advantage Mortgage Insurance mortgage loan rate, the better for the borrower to take it instead of a PMI.
  • However, if your property is in a high appreciation area, or you simply monitor appreciation and you expect more than 2% appreciation per year, taking a Tax Advantage Mortgage Insurance mortgage is very likely to be a poor choice.

Make your assumptions and run the calculations to see what is best for you to figure out if a PMI or a Tax Advantage Mortgage Insurance is the best for you.

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