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New Tax Deductions for Mortgage Insurance
Some home buyers are receiving a bit of a break this year due to new legislation that will make Mortgage Insurance (MI) tax deductible for many of them. As you know, when obtaining mortgage financing, mortgage insurance is usually required by the lender when the borrower makes a down payment of less than 20 percent of the lower of the sales price or appraised value of the property. Since lenders consider these loans more risky, MI is a way the lender protects itself in the case of foreclosure. A borrower’s monthly premium varies depending on the amount of the loan, amount of down payment, credit score and the type of MI obtained. MI is one of that enables qualified borrowers to purchase a home with less than a 20 percent down payment.
Thanks to a new federal law, many home buyers you work with this year may be eligible to deduct 100 percent of their borrower paid mortgage insurance premiums on their federal tax returns for 2007. This law applies to all new purchase and refinance transactions between January 1, 2007 and December 31, 2007. According to estimates put out by the mortgage insurance industry, eligible home owners will save a total of $91 million by taking advantage of this new law.
Various deductibility stipulations apply, including:
- The tax deduction only applies to mortgages closed in 2007.
- There are income limits. A 100 percent deduction is applicable for gross incomes of $100,000 or less, with the percentage dropping to 10 percent increments for gross income amounts up to $110,000.
- No MI tax deductions are available for gross incomes over $110,000.
- This has only been approved for 2007; there are no guarantees that it will be renewed in 2008.
Your buyers should consult with a tax professional regarding issues of tax deductibility and in determining what options are most beneficial to their situation. At least for 2007, the MI deduction available to many new home owners is a nice benefit.
New for 2008
Legislation to extend the federal tax deduction allowing homeowners with low down payment mortgages to deduct the cost of their government or private mortgage insurance premiums for three more years has been signed into law by President Bush.
Qualified borrowers will be able to take the deduction if their insured mortgage originates between 2007 and 2010. The deduction was first approved late in 2006 and initially applied only to the 2007 tax year. Extension of the tax deduction for mortgage insurance premiums was part of the Mortgage Forgiveness Debt Relief Act of 2007 approved earlier this month by both the U.S. House of Representatives and the U.S. Senate.
The tax break for mortgage insurance premiums is for families with an adjusted gross income of $100,000 or less. Families with incomes up to $109,000 are eligible for a partial deduction. "Continuing this tax deduction will help low- and moderate- income consumers, particularly first-time home buyers who are unable to put down 20 percent," said Kevin Schneider, president of the Mortgage Insurance Companies of America (MICA). "On average, the annual tax break could be worth $350 per taxpayer."
Even with home prices declining in many areas, many families find it difficult to accumulate a 20 percent down payment so the need for insured mortgages with low down payments continues to grow.
"This important tax deduction is a crucial component in keeping the American dream of homeownership alive for many families," said Suzanne Hutchinson, MICA Executive Vice President. "As risky, exotic loans are no longer considered viable housing finance options, more secure loans with private mortgage insurance remain readily available for qualified borrowers."
MICA is the trade association representing the private mortgage insurance industry. Its members help loan originators and investors make funds available to home buyers for low down payment mortgages by protecting these institutions from a major portion of the financial risk of default.
SOURCE: Mortgage Insurance Companies of America (MICA)
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