Economic News

Sun sets on mortgage insurance deduction

by Broderick Perkins

(1/27/2012) Erate Exclusive - The mortgage insurance tax deduction is history and that means owning a home is more expensive.

Originally effective Jan. 1 2008, the "Mortgage Forgiveness Debt Relief Act of 2007" was largely known for temporarily exempting from taxation, any debt a lender forgave as part of a short sale, principal write-down, canceled second mortgage or other mortgage work out.

Before the law was passed, such forgiven debt was often, though not always, taxed as income. That portion of the law remains in effect through 2012.

The law also contained a provision that likely benefited more homeowners - a tax deduction for government or private mortgage insurance, first available to those who purchased or refinanced homes (only up to the original loan amount) in 2007. Some second homes also qualified.

The mortgage insurance deduction provision was later extended for those who purchased or refinanced homes from the 2007 to 2011 tax years.

Lenders levy mortgage insurance to protect themselves from risk when a borrower's down payment is less than 20 percent of the purchase price and other loans are not used to make up the difference.

For years, especially during boom times, using mortgage insurance has been a way for savings-poor, but income-rich buyers to afford a home that was otherwise out of reach. It remains popular, especially in high-cost markets where it's tough to come up with 20 percent down.

The home owner pays the mortgage insurance premium, but the insurance protects the lender from the risk of financing more than 80 percent of the cost of a home. Studies show borrowers with smaller starter equity stakes in their homes — less than 20 percent - have more mortgage payment problems than those who have larger equity stakes - 20 percent or more.

The cost of mortgage insurance is equal to about one-half of one percent of the mortgage amount, or about $1,000 on a $200,000 loan. A homeowner in the 25 percent tax bracket, would save about $250 before the law expired.

The average annual tax savings was between $300 and $350 per family, according to the Mortgage Insurance Company of America (MICA), more for higher cost homes.

Removing mortgage insurance

Now, the only break homeowners can get on mortgage insurance is getting rid of it when they qualify.

To protect mortgage insurance consumers from paying the insurance longer than necessary, another federal law, the "Homeowners Protection Act of 1997" grants homeowners greater disclosure rights and the right to cancel the insurance once they reach certain equity level milestones.

The current dysfunctional U.S. Congress isn't likely to revive the mortgage insurance tax deduction provision, which was overlooked during year-end budget skirmishes.

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