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 will 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"
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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 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 |
