Tax-deductible, but worth it? New light on mortgage insurance (excerpts from full article)
Deductibility of premiums for mortgage insurance is a new wrinkle of the federal tax code, but the provision is catching on very slowly.
The belief of many brokers is that there are better alternatives to mortgage insurance, for people with small downpayments; and the limitations of the law. Still, the law could help buyers.
“For the first time ever, there is the possibility that (mortgage insurance) is a great idea,” said Brad Stroh, co-chief executive officer and founder of Bills.com, a personal finance Internet portal based in San Mateo, Calif. “You could end up saving a great deal of money.”
The provision, passed at the end of December, allows people with household incomes of $100,000 or less to deduct mortgage insurance premiums on their federal income taxes in 2007.
Mortgage insurance is often required for deals in which a buyer puts down less than 20 percent toward the price of a house. It covers the risk to the lender should the borrower be unable to keep up payments, and usually must be maintained until the borrower has at least 20 percent equity in the property. Premiums vary, with credit scores, the amount of downpayment and the type of property among the variables.
In recent years, many buyers with less than 20 percent have avoided the cost of insurance by taking out a first mortgage for 80 percent of the value and a second mortgage to raise money toward the downpayment. As the interest paid on that second loan is deductible, and as part of its monthly payment goes into the equity of the home, many brokers have recommended such loans as better than buying mortgage insurance. Milwaukee’s MGIC Investment Corp. pushed to have the insurance premiums become deductible as a way of fighting that strategy.
In less-affluent neighborhoods, lack of knowledge about the deductibility, or the fact that most people do not itemize deductions, has slowed acceptance.
The percentage of mortgages with insurance is expected to increase this year, but it will be difficult to tell how much is because of the new law. Higher interest rates and more selective lenders also will contribute.
The limited term of the law also works against it. Congress will have to extend it for the premiums to remain deductible after 2007.
If the law is extended and people can deduct mortgage insurance premiums for five years and then cancel the insurance when they have paid down enough of their mortgage to have 20 percent equity in their home, then the attractiveness of mortgage insurance rises. If the home gains value, too, then the 20 percent equity will be reached even sooner, and insurance can be canceled in fewer years. That can make paying for it cheaper than paying a high-interest rate for a second mortgage.
The best thing to do is to take a sharp pencil to the matter, and figure costs for several years with and without insurance, said Michael Holloway, a buyer’s broker and owner of Homebuyer Associates, Milwaukee.
“The smart people will simply do the math, and the math will answer the question,” he said.
Copyright © 2007, Milwaukee Journal Sentinel, Avrum D. Lank. Distributed by McClatchy-Tribune News Service.