Written by Broderick Perkins
Years in the making, a federal tax deduction for mortgage insurance is all but assured after bills which include the provision were passed last month by both the House of Representatives and the U.S. Senate.
Only borrowers who close loans during and after 2007 and make less than $100,000 a year will be eligible to deduct all the private or government mortgage insurance paid for the year.
A tax deduction reduces taxable income, leaving less income to tax. The new break with result in an average tax savings of between $300 and $350, according to Howard Glaser, a Washington lobbyist and former senior official in the Department of Housing and Urban Development.
During the past five years, about one in five new loans have included mortgage insurance, according to Jeff Lubar, a spokesman for the Mortgage Insurance Companies of America, a trade group for private insurers, but the number of new policies has fallen.
The group’s “2006-2007 Fact Book &Membership Directory” reports nearly 1.6 million private policies and about 700,000 government policies (for FHA and VA loans) were written in 2005. In 2002 there were approximately 2.3 million private policies and about 1.6 million government policies written.
The growth in the use of piggy-back loans, down-payment assistance programs, other creative financing and rapid home price appreciation that allows home owners to refinance have all contributed to the declining number of policies.
Maligned years ago when two in five new loans were saddled with the coverage, and before laws mandated full annual disclosures and the right to cancellation, mortgage insurance has its pluses and minuses.
Because buyers with down payments of less than 20 percent have higher default rates, the insurance is typically mandated on low down payment loans or first loans that don’t also come with a second or “piggy-back” loan to bring the down payment to 20 percent.
The insurance protects the lender from default, but the premiums are paid by the home owner.
The premiums can be $100 or more a month but the extra cost can help a home buyer qualify for a home that otherwise could have been out of reach. The insurance can also help a buyer buy a larger home, buy a home sooner and hold onto some cash after they’ve purchased a home with a smaller down payment.
Mortgage insurance has been around in some form since the late 1800s, but it wasn’t until 1999 and the federal “Homeowners Protection Act of 1997” when home owners gained disclosure reforms and broader insurance cancellation rights.
Before the law, many borrowers could only cancel by refinancing to a loan with a balance 80 percent or less of the home’s value, say, because the home’s value had appreciated. Many who wanted to keep their current mortgage, but cancel because their home’s value had jumped, were at the mercy of the lender.
Since 1999, private mortgage insurers must annually disclose the amount of insurance paid and automatically cancel mortgage insurance when a homeowner pays down the mortgage to 78 percent of the original purchase price.
A lender also must cancel the insurance if a home owner requests it and the mortgage balance is 80 percent of the original value of the house.
In both cases, the borrower must be current on mortgage payments and meet other requirements. Refinancing to a loan that’s 80 percent or less of the home’s value remains an option.
Unfortunately, the law doesn’t apply to government insured loans and some others.
With a presidential signature, which is likely, the new law will allow the tax deduction for all mortgage insurance — private and government — paid by qualifying tax payers.