Mortgage Insurance is Now Tax-Deductible

Here's some info that just might save you money on your taxes nest year! Mortgage lenders usually require mortgage insurance for borrowers who have less than a 20% down payment. This insurance covers the lender in case the borrower defaults on the loan. Mortgage insurance has made homeownership more accessible for most Americans.

One of the problems with mortgage insurance is that it is not tax-deductible like mortgage interest and is viewed as something to be avoided. Over the past decade, “piggyback” loans have become a popular alternative to mortgage insurance. By combining a 1st mortgage for 80% of the sales price and adding a 2nd mortgage (piggyback) for the remainder, you can avoid mortgage insurance.

Over the past couple years, though, many people have seen the disadvantages of the piggyback loan. First, over the past couple years, short-term interest rates such as the Prime Rate (which many 2nd mortgages are tied to) have risen dramatically, thus increasing the payments on the second mortgages. Many people are now paying more than they would have with the one mortgage and mortgage insurance.

Second, borrower can eliminate mortgage insurance after a period of time, as long as they maintain a good payment record and are at a certain loan to value level. So, if your home appreciated in the past couple years, and you made your payments on time, you could have eliminated the mortgage insurance by now. With the piggyback loan, you would have to refinance it with your 1st mortgage into one loan – but rates are higher now.

Lastly, there is the convenience factor - two loans, two applications, two set of underwriting guidelines, and two payments to make. Many people would just rather make one payment per month and not have to worry about it.

In December 2006, Congress approved legislation that will make mortgage insurance payments tax-deductible.

• Effective for the 2007 tax year on loans closed on or after January 1, 2007
• For households with adjusted gross income of $100,000 or less
• 100% deductible mortgage insurance premiums for qualified applicants
• Simplified mortgage process — only one loan needed!

This law is expected to save nearly 1 Millions Americans about $91 Million when they file their tax returns in 2008. This will make the option of mortgage insurance much more attractive to more people than it has in the past.

However, this legislation is only for one year and only covers borrowers with an adjusted gross income of $100,000 or less. So, there are still several reasons that you may want to consider a piggyback loan. A mortgage professional can help you weigh the pros and cons of all of your options.

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