Suddenly, Private Mortgage Insurance is back in vogue.  If only by default. 

Since 2002, many homeowners have financed a portion of their homes using second mortgages.  It wasn't well-publicized, but these "piggyback" loans that helped people finance 85%, 90%, 95% or 100% of their home's value were really sub-prime loans, reflecting the greater risk in lending over 80% on a home's value.

With the demise of sub-prime lending, so went many lending sources for home equity loans.  As mortgage guidelines tighten, home equity loans are becoming either (1) scarce, (2) expensive, or (3) both.

The higher costs are one reason why PMI is once again a viable option for homeowners with less than 20% equity in their homes.

We've talked about the "quick snap back to 2002".  Well, that we're even talking about PMI at all is one more supporting argument.  Check out this Bankrate.com article from that year.  Despite its age, some salient points are raised.

Even as second mortgages increase in rate, PMI payments still tend to be slightly higher than its piggyback counterparts.  The Tax Relief and Health Care Act of 2006 narrows that gap, however, using tax deductibility.  The act grants itemized deductions for some private mortgage insurance (PMI) and government mortgage insurance (MIP) expense premiums paid in 2007.

For all loans originated in the 2007 calendar year, mortgage insurance is tax-deductible provided that two tests are met:

1. The homeowner's household income is $100,000 or less in 2007
2. The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000.  So, if a single person earns $90,000 in 2007 and buys a home using MI, the MI expenses are tax-deductible in 2007. 

However, there's a catch!  Because the tax code is due to expire December 31, 2007, there is no guarantee that the MI will be tax-deductible in 2008.  As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction. 

Because mortgage guidelines continue to shrink and second mortgages grow more scarce, PMI is expected to grow in popularity.  When it does, the graphic/poll above will shift, too.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.