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Mortgage Insurance Tax Deduction

by David Paget

 

The American Tax Payer Relief Act of 2012 passed early this year, re-instated a law enabling U.S. homeowners to deduct their annual mortgage insurance premiums from their taxes. The law expired in 2011, but with the Tax Payer Relief Act, Congress extended the deduction for 2012 and 2013. In addition, it retroactively applies to any mortgage insurance premiums paid after Dec. 31, 2011.

 

Borrowers with an annual adjusted gross income of less than $100,000 filing an itemized return are able to deduct 100 percent of their annual mortgage insurance premium. Individuals with higher incomes are still eligible to deduct their premiums, but the amount a homeowner can deduct decreases with higher income levels.

 

Nearly 3.6 million tax payers claimed the mortgage interest deduction in 2009, the most recent year Internal Revenue Service data is available. Combined, American homeowners will save about $100 billion this year from the mortgage interest deduction, according to Compass Point Research & Trading. These savings will help make buying a home more affordable than renting. Combining continued low interest rates and the extension of the mortgage insurance tax deduction, now is still an excellent time to buy a new home or refinance.

 

Mortgage Insurance Cancellation for FHA Loans – The U.S. Department of Housing and Urban Development announced late last year its plan to revise the cancellation of mortgage insurance premiums for Federal Housing Administration loans for which the outstanding principal balance reaches less than 78 percent of the original principal balance.

The changes to the mortgage insurance cancellation, expected sometime in 2013, are a response to the FHA’s struggling finances.

 

HUD in its Annual Report to Congress wrote: Analyses conducted by FHA’s Office of Risk Management projects lost revenue by approximately $10 billion in the 2010-2012 vintages as a result of the current cancellation policy. The same analyses also suggest that 10%-12% of all claims losses will occur after MIP cancellation. Therefore, beginning with new loans endorsed after the policy change becomes effective later in FY 2013, FHA will once again collect premiums on FHA loans for the entire period during which they are insured, permitting FHA to retain significant revenue that is currently being forfeited prematurely.

 

For homeowners with FHA loans, the monthly mortgage insurance premium will cancel once the principal balance reaches 78 percent of the loan to value and the borrower has made 60 consecutive mortgage payments. If a borrower currently has an FHA loan and is considering refinancing, it may be best to refinance now before these changes take effect.

 

David Paget is a Mortgage Loan Originator for W.J. Bradley Mortgage Capital, LLC. He may be contacted with your mortgage questions at (951) 225-3870 or by email at David.Paget@WJBradley.com. NMLS #268595