New legislation allows taxpayers who itemize their deductions to deduct premiums paid for mortgage insurance - which typically is required when home buyers purchase their homes with less than 20 percent down. Currently, only the interest paid on ones mortgage is deductible if the taxpayer itemizes deductions.Based on the new legislation passed December 9, 2006, the provision is effective for transactions closed after December 31, 2006. MI premiums paid between January 1 and December 31, 2007 may qualify for tax deductibility on borrowers’ subsequent federal tax returns as follows:
Borrowers with adjusted gross incomes below $100,000 may deduct 100% of their MI premiums.
Deductions are phased out at 10% increments for borrowers with adjusted gross incomes between $100,000 and $109,000.
This new legislation helps low- and moderate-income Americans overcome barriers to homeownership. By making mortgage insurance tax-deductible, Congress is addressing the key issue of housing affordability for many homebuyers.
The new tax code was written so that mortgage insurance will be deductible if you purchase a home in 2007, but will NOT apply to mortgage insurance on existing mortgages.
Mortgage insurance can be avoided by utilizing a second mortgage for the amount needed to complete your transaction above the standard 80% loan to value of the first mortgage. An example is as follows: you are purchasing a home for $200,000. You plan on obtaining a mortgage for $180,000 or 90% loan to value. Instead of obtaining a 90% LTV mortgage and paying mortgage insurance, you can simply obtain a first mortgage of $160,000 and a second mortgage from the same lender for $20,000 and avoid the mortgage insurance all together. This has become a common way to approach a high loan to value transaction. Ask your mortgage professional to explain the cost benefits of each approach so you can make the decision that best suits your particular situation.
Depending on your credit, you may also qualify for a loan with less than 20% down with no separate mortgage insurance payment required.
There is an alternative to high rate second mortgages (commonly called combo loans) and hard to understand mortgage insurance premiums. It's called Lender Paid Mortgage Insurance, and allows you to roll a mortgage insurance premium into your mortgage payment. Depending on your credit, this can be a more convenient and less expensive alternative to mortgage insurance.
If your credit is less than perfect, we have a variety of programs which can allow you to borrow up to 100% of the value of your home with no mortgage insurance at all. In many cases, the total monthly payment on one 100% loan with no mortgage insurance is lower than an 80/20 combo payment for a borrower with slightly higher credit!
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