What is private mortgage insurance, and how does it work?

There are many home-related tax breaks that homeowners can claim each filing season.

But there also are a lot of added costs that come with purchasing a home.

For buyers unable to make a down payment of at least 20 percent of their home’s purchase price, one of those costs is private mortgage insurance, or PMI. A PMI policy is coverage that you, the homebuyer, pay for, but it protects your lender in case you default on your loan.

Now, however, some PMI payers can at least use those insurance payments as a tax deduction when they file their returns.

Originated in 2007, extended through 2016

This tax deduction was created as part of the Tax Relief and Health Care Act of 2006 and originally applied to PMI policies issued in 2007.

But because the housing market has been slow to recover, lawmakers have extended this tax break. As part of the Protecting Americans from Tax Hikes, or PATH, Act of 2015 that was enacted in December 2015, this tax deduction is in effect for premiums paid through 2016. For future tax years, Congress must renew it.

The PMI deduction can be taken for policies issued by private insurers, as well as insurance provided by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture’s Rural Housing Service.

Counted as interest

Many homeowners itemize deductions because their mortgage interest and property tax payments exceed the standard deduction amount they could claim.

It’s in the “Interest You Paid” section of your Schedule A that you’ll find the PMI deduction. It is claimed on line 13.

What amount of PMI do you claim? You should find the amount in box 4 of the Form 1098 (or the substitute year-end loan information statement) that your lender sent you.

Time, occupancy restrictions

While it’s easy to claim the PMI deduction, make sure you meet the requirements.

First, note when you paid the mortgage insurance. The deduction is allowed only if you took out the mortgage on which you pay PMI on or after Jan. 1, 2007. No PMI premiums are deductible if they were made in connection with a home loan that was made before that date.

Any associated PMI premiums on new mortgages issued through 2016 will qualify for the deduction.

If you refinanced your home since Jan. 1, 2007, you also qualify for the PMI deduction on that loan.

Be careful as to how you structure your refi. The mortgage insurance deduction applies to refinances up to the original loan amount, but not to any extra cash you might get with the new home loan.