Mortgage-insurance premiums can be tax deductible

WASHINGTON -- Slowly but surely, mortgage borrowers seem to be discovering the fact that mortgage-insurance premiums will be deductible for the 2007 tax year.

According to data from the Mortgage Insurance Cos. of America (MICA), a Washington, D.C.-based trade group, more borrowers in each of the first three months of the year have turned to private mortgage insurance (PMI) to help buy or refinance their homes than in the previous month.

There was a 55 percent increase in the number opting for PMI in March alone.

For the first time ever, mortgage-insurance premiums on conventional, as well as government loans can be written off on next year's tax return.

Private mortgage insurance is required by lenders willing to allow borrowers to put up less than 20 percent of the purchase price or, in the case of owners wishing to refinance their properties, 20 percent of the home's appraised value.

According to MICA, which represents six of the nation's seven private insurers, the typical buyer can purchase a house 10 years sooner by using mortgage insurance.

The cost varies widely, depending on a number of factors: How large -- or small -- the cash down payment, the type of mortgage and the amount, or "depth," of coverage required by the lender.

On a single-family home at the median price of $224,500, the cost of private-insurance coverage ranges from $50 to $100 a month.

Lenders sometimes recommend taking out two loans, a primary mortgage at 80 percent of the purchase price and a second lien at a somewhat higher rate to cover the difference between the required 20 percent down payment and the amount of cash the borrower can put into the deal.

These so-called "piggyback" loans can sometimes be cheaper than mortgages with insurance because interest on both loans is tax deductible. But they have their drawbacks, too.

They require two closings, so settlement fees are higher. And they must be paid back in full. They cannot be canceled like mortgage insurance, which can be jettisoned when the difference between the outstanding loan amount and the current value of the property reaches a certain point.

Of course, the best way to determine which product is best for your situation is to do the math.

But this year, anyway, part of the equation involves the ability to write off a portion of your mortgage-insurance premiums.

That may not be as great as it sounds, however. For one thing, it's not a dollar-for-dollar write-off.

Like mortgage interest, it is a "below the line" deduction based on your tax bracket. So, if you are in the 31 percent bracket, your actual tax benefit is only 31 cents on every dollar of insurance premium.

For another, you can claim the write-off only if you file an itemized return. And one more thing: The deduction is limited to borrowers with adjusted gross incomes (AGI) of $109,000 or less.

You will be eligible for the full deduction if you earn $100,000 or less of your AGI, which means your family's gross earnings, less certain adjustments for tax-deductible IRA contributions and interest on student loans. But for every $1,000 of income above the $100,000 threshold, your write-off for mortgage insurance will be reduced by 10 percent.

The average annual savings for taxpayers taking the mortgage-interest write-off will be in the $300 to $350 range, according to MICA.

There are a few other qualifications worth mentioning:

-- The write-off applies only to mortgages on a principal residence and one vacation property held for the personal use of the taxpayer for 14 days or 10 percent of the days it is rented, whichever is greater.

-- It applies to refinances up to the original loan amount. This could include first and second mortgages but not cash-out refinances. When refinancing a piggyback loan, the original loan amount is considered the sum of the first and second mortgages.

-- It applies to move-up borrowers, not just first-timers. But investor loans are not eligible.

-- There is no loan limit. The only ceiling is on the taxpayer's income.

-- The deduction does not apply to lender-paid mortgage insurance (LPMI) in which the premiums are built into the interest cost of the loan. The cost of LPMI is already deductible as interest.

Finally, if you prepay a year's worth of premiums at closing, which is a popular option, or choose to finance the entire premium by rolling it into the loan amount, only the amounts allocable to the period between the closing date and the end of the 2007 tax year will be deductible. You can't write off the whole amount in one year.

Indeed, there is a chance Congress could extend the write-off beyond the one-year trial period.

Lew Sichelman has been covering real estate for more than 30 years. He is a regular contributor to numerous shelter magazines and housing and housing finance industry publications.