Chicago Tribune
For more buyers, PMI has the write-off stuff
By Lew Sichelman, United Feature Syndicate
May 06, 2007
WASHINGTON—Slowly but surely, mortgage borrowers seem to be discovering that mortgage-insurance premiums will be deductible for the 2007 tax year.
According to data from the Mortgage Insurance Cos. of America (MICA), a Washington, D.C.-based trade group, more borrowers in each of the first three months of the year have turned to private mortgage insurance (PMI) to help buy or refinance their homes than in the previous month. There was a 55 percent increase in the number opting for PMI in March alone.
Similar data from the Federal Housing Administration shows only a slight upswing. But it is early in the spring home-buying season, and folks are still finding about the benefit lawmakers bestowed on them late last year.
Of course, a lot of other things are at play here, too. Lenders of all ilk are tightening their credit underwriting standards, and many of those who catered to borrowers with less-than-sterling credit records in the last buying binge are teetering on the brink of disaster, if they haven't shut their doors already.
But the fact that, for the first time, mortgage-insurance premiums on conventional as well as government loans can be written off on next year's tax return has had a big effect.
"We don't track why consumers and lenders elect to use mortgage insurance," says Lisa Rambler, senior vice president of marketing and product development for AIG United Guaranty in Greensboro, N.C. "But we have heard anecdotally from several lenders that more and more borrowers are using PMI because of the tax write-off."
Private mortgage insurance is required by lenders who allow borrowers to put up less than 20 percent of the purchase price or, in the case of refinancers, 20 percent of the home's appraised value.
Actuarial studies have shown that the less skin borrowers have in the game, the more likely they are to default on their monthly payments. But because it is so difficult and time-consuming for most people to come up with enough money for that 20 percent down, lenders accept mortgage insurance as a substitute.
Saving for a down payment is particularly tough on first-timers. Unlike repeat buyers, who often can avoid mortgage insurance by using some or all of the equity they've built up in their current residence to meet the 20 percent threshold, rookies have to scrimp and save -- or borrow from friends and relatives.
According to MICA, which represents six of the nation's seven private insurers, the typical buyer can purchase a house 10 years sooner with mortgage insurance.
While the coverage protects lenders against the possibility that the borrower will not make his payments, the borrower pays the freight, and it ain't cheap.
On a single-family home at the median price of $224,500, private-insurance coverage costs $50 to $100 a month.
Often the fee is so expensive that lenders sometimes recommend taking out two loans, a primary mortgage at 80 percent of the purchase price and a second loan at a somewhat higher rate to cover the difference between the 20 percent down and the amount of cash the borrower can put into the deal.
These so-called "piggyback" loans can be cheaper than mortgages with insurance because interest on both is tax deductible. But they have their drawbacks. They require two closings, so settlement fees are higher. And they must be paid back in full. They cannot be canceled like mortgage insurance, which can be jettisoned when the difference between the outstanding loan amount and the current value of the property reaches a certain point.
Of course, the best way to determine which product is best for you is to do the math. But this year, anyway, part of the equation involves the ability to write off a portion of your mortgage-insurance premiums.
That may not be as great as it sounds, however. For one thing, it's not a dollar-for-dollar write-off. Like mortgage interest, it is a "below the line" deduction based on your tax bracket. So, if you are in the 31 percent bracket, your tax benefit is only 31 cents on every dollar of insurance premium.
For another, you can claim the write-off only if you itemize. But if the standard deduction is more beneficial, the PMI deduction is useless.
And one more thing: The deduction is limited to borrowers with adjusted gross incomes (AGI) of $109,000 or less.
You will be eligible for the full deduction if you earn $100,000 or less of your AGI, which means your family's gross earnings, less certain adjustments for tax-deductible IRA contributions and interest on student loans. But for every $1,000 of income above the $100,000 threshold, your write-off for mortgage insurance will decline by 10 percent.
Despite this, the average annual savings for taxpayers taking the mortgage-interest write-off will be around $300 to $350, according to MICA. Not a lot, but not pocket change, either.
There are a few other limitations worth mentioning:
- The write-off applies only to mortgages on a principal residence and one vacation property held for the personal use of the taxpayer for 14 days or 10 percent of the days it is rented, whichever is greater.
- It applies to refinances up to the original loan amount. This could include first and second mortgages but not cash-out refinances. When refinancing a piggyback loan, the original loan amount is considered the sum of the first and second mortgages.
- Investor loans don't qualify.
- There is no loan limit. The only ceiling is on the taxpayer's income.
- The deduction does not apply to lender-paid mortgage insurance (LPMI) in which the premiums are built into the interest cost of the loan. LPMI costs are already deductible as interest.
Finally, if you prepay a year's worth of premiums at closing, which is a popular option, or choose to finance the entire premium by rolling it into the loan amount, only the amounts allocated to the period between the closing date and the end of the 2007 tax year will be deductible. You can't write off the whole amount in one year.
And there is a chance Congress could extend the write-off beyond the one-year trial period. The broad coalition of tax, consumer, civil rights and civic groups that persuaded lawmakers to give the deduction a shot are seeking an extension.