2/06/2007

Good News for Loan Financing--Mortgage Insurance is Tax Deductible in 2007

Buyers have always been faced with certain loan condition when making less than a 20 percent down payment on a home. To avoid paying that extra non-tax deductible mortgage insurance premium -- or a higher interest rate factored into some 10 percent down loan programs -- buyers frequently chose "piggyback" seconds whose interest was tax deductible. But, Congress recently passed legislation that provides for an itemized deduction on federal tax returns for the cost of private mortgage insurance paid by eligible borrowers. Previously, borrowers could not deduct the cost of their mortgage insurance payments. Now, a new federal law allows qualified borrowers with adjusted gross incomes up to $100,000 to deduct 100% of their 2007 MI premiums on their federal tax returns. The legislation is effective for mortgage insurance certificates issued in 2007.

Individual savings will vary depending on the size of the loan and a borrower’s adjusted gross income and tax bracket. According to an analysis by Bankrate, a leading source of consumer financial information, a homeowner with a $180,000 mortgage would save about $351 in taxes a year.

This new deductability allows buyers to now reconsider whether to choose lender seconds--where the interest has always been tax deductible but higher interest rates now apply--or go with deductible mortage insurance which may have extremely competitive ratios compared to the current interest rates on many piggyback loans.

The legislation specifies that the tax deduction applies to mortgage insurance contracts issued between January 1 and December 31, 2007, so it would include purchases and refinances within that year. However, Congress has the power to extend the tax deduction to future years, or even to make it permanent. This currently does not apply to investor purchases.

Currently, this MI tax-deductibility legislation only applies to eligible borrowers with adjusted gross incomes of $109,000 or less who purchase or refinance a home between January 1 and December 31, 2007 and pay mortgage insurance premiums. Mortgage insurance premiums allocable to 2007 will be fully deductible for eligible taxpayers earning up to $100,000. The amount of the deduction incrementally phases out for those who have adjusted gross incomes between $100,000 and $109,000 annually. For more specific information, please visit www.pmi-us.com/tax.

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