Hello and welcome to Moneygirls quick and dirty tips for a richer life.

Today's topic, a new tax deduction for homebuyers.

A nifty new tax deduction is available to homebuyers this year.

In late December, the President signed a tax relief act in the law that makes mortgage insurance

for homes purchased in 2007 tax deductible. Okay, so what exactly is mortgage insurance

and under what circumstances can you deduct it.

Private mortgage insurance, also known as PMI, is insurance that protects the lender, not

you.

If you buy a home, the lender typically requires that you pay PMI if the amount of your

loan is 80% or greater than the value of the house.

The idea is that a loan that's more than 80% of the value of the house is a riskier loan for the lender to make.

In the eyes of the lender you might be more likely to walk away from the loan or be stretching more financially to buy the house since you put less than 20% down.

In reality, these assumptions may or may not be the case, for example.

Many homebuyers and investors can put 20% or more down but choose not to so that they can keep more of their money working for them through their other investments.

If the borrower defaults, PMI ensures the lender in the event that they need to foreclose on the house.

Even though this insurance protects the lender, unfortunately the borrower pays for it.

PMI is a charge that's typically added to your monthly mortgage payment.

The cost of PMI increases as your down payment decreases.

The annual cost of PMI varies, but it's generally around 0.5% of the loan amount.

And getting rid of PMI isn't always straightforward, but it's usually possible after

you have at least 20% equity in the house.

More on this topic in a future episode.

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