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FHA Mortgage Insurance Now Tax Deductible

FHA mortgage insurance (private mortgage insurance, also known as PMI) on your FHA home loan is now tax deductible. This means that now your FHA mortgage insurance can be written off for tax purposes. The Mortgage Insurance Fairness Act provides a good tax deduction from the FHA Mortgage Insurance Premium (MIP). It was originally set to expire on December 31, 2007. But, now qualified borrowers can continue to take the deduction for the amount of their mortgage insurance if their insured mortgage originates between 2007 and 2010, instead of just during the year of 2007.

Qualified borrowers are families with an adjusted gross income of $100,000 or less. Families with incomes up to $109,000 are eligible for a partial deduction. The Act also provides a tax deduction for mortgage insurance premium (MIP) and the Veterans Administration’s (VA’s) funding fee. The deduction only applies to mortgage contracts that were made for primary, secondary and vacation insured loans. It also includes refinance loans. However, investment loans are not included because the home needs to be a principle residence or a residence for personal use.

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Mortgage insurance premium, including FHA’s PMI and VA’s funding fee, is an insurance that protects lenders from the risk of financing more than 80% of the cost of a home. Studies show that borrowers with less than 20% starter equity in their homes are more likely to default than those who put 20% or more down. The premium protects the lender in case the borrower defaults. These premiums average between $50 and $100 a month.

This year we hope that Federal Housing Administration resists rising the mortgage insurance premiums; because it certainly eroded at the potential savings a borrower could receive when getting refinancing loans. Fortunately, this year we have seen little change to the FHA loan requirements.

A few years back, the Mortgage Insurance Companies of America (MICA) estimates 2 million families benefited from the deduction, resulting in an average tax savings between $300 and $350. Once the homeowner's equity reaches 78 percent loan-to-value (LTV), based on the initial purchase price/appraised value of the home and the principal payments made against the mortgage loan, they are granted greater disclosure rights and the right to cancel the insurance under the Homeowners Protection Act of 1997.

According to HUD, an FHA mortgage closed prior to January 1, 2001 will not be eligible for termination of MIP. For loans closed on or after January 1, 2001, if you paid an upfront mortgage insurance premium on your FHA loan, you will also be charged a monthly mortgage insurance premium until the loan-to-value of your mortgage reaches 78 percent of the initial sales price or appraised value of your home, whichever was lower (provided that premiums are paid for at least five years). Your lender can advise you on when the mortgage will reach the 78 percent loan-to-value threshold. If you were not charged an upfront premium, you will pay the monthly premium for the life of the mortgage.

There are other requirements to be met before your mortgage insurance can be automatically cancelled. Check with your lender to find out what their guidelines state. With mortgage insurance being tax deductible, no equity home refinancing with FHA or buying a home with only 3% down (3.5% as of January 1, 2009) makes good financial sense for the cash-strapped buyer. Suzanne Hutchinson, MICA's executive vice president says, "As risky, exotic loans are no longer considered viable housing finance options, more secure loans with private mortgage insurance remain readily available for qualified borrowers."

Are you a cash-strapped buyer looking to buy your first home? Complete the free loan quote on this page. You may qualify for a low-interest FHA loan with little out-of-pocket expense. Fill out the form if you’re looking to refinance, as well. You could end up saving a lot of money, and the mortgage insurance is now tax deductible.

 

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