Mortgage Insurance Tax Benefits: A New Consideration for Home Buyers

Despite conflicts over whether or not the new mortgage insurance tax deductions are a good deal, many owners are considering their options anew.

“It’s certainly a benefit for PMI (private mortgage insurance) if it’s tax-deductible,” said Ron Briscoe, vice president of Bank of Illinois in Normal. “It puts it on a more level playing field.”

Typically, lenders consider people who make a down payment of less than 20% to be riskier borrowers. To cover that risk, individuals often have to get mortgage insurance or a piggyback loan.

Mortgage insurance overview: Mortgage insurance covers the cost for the lender in case of a foreclosure. Borrowers who choose a piggyback loan don’t need insurance, but they have two home loans - one for 80% of the home’s value and a second mortgage at a higher interest rate to cover the rest of the loan amount.

Piggyback mortgages often are referred to as an 80-10-10 or an 80-15-5 depending on the loan amounts and down payments. An 80-15-5, for example, means a borrower is getting an 80% home loan, a 15% piggyback loan and making a 5% down payment.

Piggybacks have had an advantage over loans with mortgage insurance because combined payments are a little less and interest on both loans was tax-deductible.

Now the new law is turning the financial industry across the nation and in the Central Illinois housing market upside down and giving everyone a little more to consider.

“We’ve always figured different scenarios,” said Dave Usiak, a loan officer with 1st Advantage Mortgage, formerly Mortgage Services Illinois, in Bloomington. “Now you’ve got this extra variable in here with people - are they going to save more money because of the tax deduction?”

Assuming a borrower has good credit and is in the 25% tax bracket, a homeowner with an $180,000 mortgage would save about $351 in taxes a year, according to an analysis by Bankrate, Inc., a financial rate data research group.

The deduction may reduce a lot of the need for piggybacks, Briscoe said. Still, “it’s not just do this or do that,” Briscoe said. “It depends on their situation.”

Borrowers have to consider how long they’ll stay in their homes, whether they’ll prepay or make extra home loan payments and their comfort level, he said.

Borrowers are stuck with a piggyback loan until it’s paid off, but they can cancel mortgage insurance once they’ve reached 20 percent of their home’s value. How long that takes depends on the size of the loan and the down payment; the bigger the loan, the more insurance someone will get, said Tyler Ross, a loan officer at Farmer City State Bank in Farmer City.

Home shoppers are faced with a tough choice, and banks will see more people opting for private mortgage insurance, Ross said. He’d probably recommend insurance if someone puts down 15%; he’d encourage piggybacks if borrowers have less than 10% for a down payment. Overall, he’s still recommending piggyback loans.

“I think it’s cheaper to do the piggyback loan,” Ross said. “You’re saving your money right now, up front.”

Conditions, such as income requirements, are attached to the mortgage insurance tax-deduction. Right now, the program also is only available this year, though many believe Congress will extend it, Usiak said.

Still, some people might not want to take the risk that they won’t be able to deduct interest next year, said Randy Jannusch, partner and certified public accountant with Dunbar, Breitweiser and Co., LLP, in Bloomington.

“If these things work out to be fairly close and the tax deduction is the determining factor … I’d go with the sure thing. I’d go with the piggyback loan. We know that would be tax deductible.”

The tax write-off: Mortgage insurance will be tax-deductible for some people who buy a house in 2007. But before mortgage shoppers jump on board, they need to be aware of a few stipulations:

- The tax deduction applies only to mortgages that are closed in 2007. Homeowners could go through with mortgage refinancing in 2007 and also deduct the interest.

- Homeowners are eligible for a full deduction if their income is $100,000 or less. Up to $110,000, deductions are available on a tiered basis.

- It’s not guaranteed that mortgage insurance will be tax-deductible in 2008. Congress would have to renew the deduction to make it applicable for the 2008 tax year and beyond.

- Taxpayers must itemize deductions on their tax returns and not just take the standard deductions.