Editorial: Mortgage Insurance Tax Break Overrated
Today’s Lakeland Ledger contains an article detailing the new tax break for mortgage insurance - and whether it makes sense for homeowners. The results may surprise you.
When she heard about a new tax break for mortgage insurance, Kathryn Considine, who paid $55 a month for it last year, was delighted.
“I thought if I could deduct what I paid this past year, that would be great,” she said.
But she actually won’t get the tax deduction - and neither will anyone - unless the premiums you’re paying are for a home mortgage loan you take out this year.
Even if you qualify, the deduction is good for only one year.
The mortgage insurance deduction, part of the last-minute tax bill Congress passed in December, turns out to be yet another example of tax policy gone wrong.
Here’s a little background:
To reduce their risk of losing money, a mortgage lender usually requires mortgage insurance if you put down less than 20 percent of the purchase price of a home. It pays off if you default.
The drawback: The premiums increase your mortgage payment, typically by $50-100 a month. However, many buyers get around this requirement with a piggyback mortgage deal - an 80 percent first mortgage paired with a 20 percent home equity loan or credit line at a higher interest rate.
This pairing became very popular when short-term home loan rates were low, causing a drop-off in business for mortgage insurance companies.
The industry’s solution was to lobby Congress to make premiums deductible, calling for a more level playing field. Many groups interested in making affordable housing more plentiful supported the effort.
“We are pleased that policymakers have recognized mortgage insurance as a cost of finance just like mortgage interest,” Suzanne Hutchinson, executive vice president of the trade group Mortgage Insurance Companies of America, said.
The association says as many as 2 million families will be buy or refinance an insured mortgage loan next year and be eligible for the tax break. Their incomes must be less than $110,000 a year. No home loan refinancing can be for more than the original loan on the home.
Unfortunately, this new deduction flunks a basic fairness test:
- Why should 2 million families who take out new mortgages get a tax break while millions of others paying mortgage insurance premiums do not?
- And why should mortgage insurance get better tax treatment than property insurance, which also is required by a mortgage company and is much more costly?
The arrangement also flunks a common-sense test:
- No deduction should be added to the tax code for just one year, especially one that is complicated to apply and save people anything significant on their home mortgages.
So why did we end up with what we did? An unfair bill that expires after one year costs a lot less than one that’s more comprehensive and becomes a permanent part of the tax code.
As it is written, the cost to the government is just $91 million in lost tax revenue. But of course that’s a misleading number because the next lobbying effort will be to extend it.
“It was a good way to get the deduction on the books without having to get into how this will impact the federal budget beyond one year,” association spokesman Jeff Lubar said.
At least he’s honest.