Happy New Year from…Uncle Sam?

Posted at 12:15 PM, Dec. 28, 2006

That's right. Contrary to his usual habit of dipping into your pocket, Uncle Sam has a gift for you in 2007 if you buy or refinance a home. For the first time, mortgage insurance premiums will be tax deductible. This means that, for some people, getting mortgage insurance could be cheaper than using a piggyback loan to cover the downpayment.

According to an article on Seattlepi.com, "… lenders consider you a riskier borrower if you make a down payment of less than 20 percent." Historically, people have had the choice of paying for that risk by taking a piggyback loan or buying mortgage insurance.  Since mortgage insurance has been a non-deductible expense, most people took the loan. That got them into the house, but also burdened them with a higher total loan and less equity. 

As one of its last acts, the 109^th Congress passed the bill that creates the deduction for mortgage insurance, and the President signed the billed into law. This new legislation is welcomed by The Mortgage Insurance Companies of America (MICA), a trade association. MICA Executive Vice President Suzanne Hutchinson said, "We are pleased that policymakers have recognized mortgage insurance as a cost of finance just like mortgage interest. Mortgage insurance plays a crucial role in maintaining the stability and continued health of the mortgage finance system. In today’s climate of steadily rising interest rates and slowing home price appreciation, an insured loan is often the most borrower-friendly alternative."

 There are some restrictions, of course, but they won't block many homeowners from taking the deduction. The limits include:

·        You can only take the deduction for mortgages that are closed in 2007. This means that only new loans or loans refinanced in 2007   qualify.

 ·        There are income limits. You can get the full deduction if your adjusted gross income is $100,000 or less, and you must itemize to get the deduction.

 ·        This is for one year only. If Congress wants to extend the deduction beyond 2007, it will have to pass further legislation.

Of course, you should always talk to your tax/financial advisor before making a decision that affects your tax liability, including the choice of a piggyback loan vs. private mortgage insurance.

The bottom line, according to the Seattlepi.com article is this:  "Don't get a piggyback loan without taking a serious look at mortgage insurance, because mortgage insurance is likely to be cheaper in the long run, and it might even cost less in the short run."

 Cheaper in the long run and might cost less in the short run – now that's a Happy New Year, thanks to your good old Uncle Sam. 

Links:

http://seattlepi.nwsource.com/business/296168_real16.html

http://www.micanews.com/press/press_releases/pr.cfv?ID=106