Mortgage Tip #1: Tax Deductible Mortgage Insurance

Did you know mortgage insurance is now tax deductible?  That’s right, Congress recently passed legislation which now allows hundreds of thousands of eligible homeowner’s to save an estimated $90+ million when they file their 2008 income tax returns.

When buying a home, lenders consider purchases with less than a 20% down payment more risky. Typically borrowers choose a single loan with mortgage insurance or a 2-part loan known as a piggyback mortgage to help alleviate the risk to the lender. A mortgage insurance policy helps to protect the lender if you fall behind on payments and the lender has to foreclose.

In recent times, piggyback loans have become the popular way of dealing with a down payment of less than 20% (a piggyback loan is two home loans, a primary loan of 80% of the home’s value and a second loan for the remainder of what you need).  Piggyback loans eliminate the need for mortgage insurance but generally have higher interest rates (especially on the second loan) costing you more over time than a single loan with mortgage insurance.

With piggyback loans, the interest on both the 1st and 2nd loan is generally fully tax deductible. Up until recently, loans with mortgage insurance were not tax deductible making piggyback loans a smarter choice for many.  That has now changed, with a few conditions:

• The tax deduction only applies to new mortgages that are closed after January 1, 2007. Loans closed prior to January 1, 2007 will not be eligible to have premiums deducted unless you refinance in 2007.
• There are income limits. You qualify for a full deduction if your annual adjusted gross income is $100,000 or less.
• This is presently a one-year deal, and Congress will need to renew the deduction to have it apply for tax years 2008 and beyond.
• The deduction is only available to borrowers who itemize their deductions on their return.  For many, this is not a problem as you are likely already deducting mortgage interest paid.

The Bottom Line: Borrower should think twice before opting for a piggyback loan without taking a serious look at mortgage insurance options, because mortgage insurance is likely to be cheaper in the long run, and it may even cost less in the short run. Now that mortgage insurance is tax deductible, it’s a sweeter deal than ever. As with any tax matter, you should always consult your accountant for your specific situation.

Contact a Cornerstone loan officer today to discuss whether tax deductible mortgage insurance makes sense for you!