Mortgage insurance is still tax deductible
Congress treats mortgage insurance premiums like a rash. Every so often they get attention on Capitol Hill, but to this point, there has not been enough interest to seriously help mortgage borrowers.Verify your new rate (Dec 11th, 2018)
The importance of mortgage insurance
Mortgage insurance is important in the housing sector because it allows borrowers to buy homes with less down. Instead of 20 percent upfront, buyers can purchase with 3-to-5 percent down (conforming loans), 3.5 percent down (FHA) and even nothing down (VA and USDA).
Instead of waiting for years to accumulate savings, buyers can purchase now. Especially in a market with rising prices, the ability to buy now is valuable. Just compare 2012 home values in most markets versus today’s prices.
The role of the write-off
If you have an FHA or VA mortgage, or if you’re financing with private mortgage insurance, you may be on the verge of losing a tax write-off. If the tax deductibility of mortgage insurance goes away, the cost of homeownership will effectively increase, making it harder to sell homes.
Mortgage insurance – known generally as MI or PMI – is used by large numbers of first-time buyers. For example, 775,000 first-time buyers financed with FHA mortgages in 2017. Get rid of the write-off for mortgage insurance premiums, and ownership becomes more expensive. Marginal buyers continue to rent, and home sales decline.
Even with PMI being deductible, we are already seeing a decline in first-timers entering the market. In January, the National Association of Realtors (NAR) reported that first-timers represented just 29 percent of homebuyers. That’s down from the long-term average of 39 percent.
Mortgage insurance premiums and tax deductions
What’s going on here? More than four million people finance and refinance with mortgages backed by the FHA, VA, or private mortgage insurance (PMI). Since 2007, the premiums on that coverage have been tax deductible. On average, borrowers have been able to write off about $1,500 a year.
So far, this all sounds pretty normal. It’s not. Every few years borrowers with mortgage insurance are left in the lurch, not knowing if they have a deduction or not.
Write-offs for mortgage insurance began in 2007 because the real estate market was on the verge of a massive downturn. Toxic programs like sub-prime loans with no income verification and so-called “option ARMs” triggered an explosion of foreclosure activity that kicked off the Great Recession.
According to ATTOM Data Solutions foreclosure notices rose from 885,000 in 2005 to 2.2 million in 2007.
Congress and mortgage insurance deductions
Official Washington was desperate to stop the carnage. With a new deduction for mortgage insurance premiums, homeowners in every congressional district suddenly had bigger tax write-offs.
Rather than a cure, the original legislation was a short-term fix. First, the legislation was set to automatically end in 2007 under the Tax Relief And Health Care Act Of 2006. Second, there was an income cap.
As Turbo Tax explains, “once your adjusted gross income (AGI) exceeds $100,000 ($50,000 for married filing separately) the deduction is reduced. The mortgage insurance deduction is eliminated once your AGI surpasses $109,000 ($54,500 if married filing separately).”
Every so often, Congress extends the deductibility of mortgage insurance premiums. Currently, we have the Bipartisan Budget Act of 2018 which says homeowners can deduct mortgage insurance premiums paid in 2017.
Mortgage insurance premiums in 2018
It’s not at all clear what will happen this year, but there are two paths forward.
First, it may be that Congress won’t revisit write-offs for mortgage insurance premiums. The deduction under this path will simply not be extended.
Second, Congress can vote to continue the write-off in 2018. That sounds like good news until you consider the fine print.
Qualified taxpayers itemize mortgage insurance premiums. If you don’t take itemized deductions, then you don’t get the write-off. Because of tax reform, a lot of people will not be itemizing. Instead, they will take the standard deduction, as much as $24,000 in 2018 for a married couple filing together.
The Tax Policy Center estimates that under tax reform, only 4 percent of all filers will elect to itemize. That compares with the usual average of 21 percent.
For specific tax advice, be sure to speak with a tax professional.
What are today’s mortgage rates?
While current mortgage rates are higher than the lowest rates of 2017, they are still very much on the low end of the historical range. You can find your best rate by shopping with several competing lenders, making yourself as attractive a borrower as possible, and considering ARM loans if you don’t plan to keep the property for 30 years.Verify your new rate (Dec 11th, 2018)