At the end of 2012, much to do was made about the Fiscal Cliff and the fact that many of the Bush era tax cuts were set to expire. However, after some last minute wrangling from our Congress men and women, many of those tax cuts were extended, to the relief of many taxpayers.
Many homeowners who were still feeling the sting from the expiration of the Mortgage Insurance Premium Tax Deduction, which expired a year ago, on January 1, 2012 will be excited to know that this deduction has been revived. This temporary tax break, which began in 2007 and only lasted 4 years, was brought back and is in effect through December 31, 2013. However, don’t get used to it; most don’t expect it to be extended one more year.
What Was the Mortgage Insurance Premium Tax Deduction?
When home buyers buy a home for less than 20% down, they must pay mortgage insurance, commonly known as private mortgage insurance or PMI. They must continue to pay this for years, until they officially own 20% of their home.
For several years, home buyers who took out low down payment loans and had to pay mortgage insurance were able to deduct these mortgage insurance payments if they met certain criteria:
1. The homeowners had to pay the mortgage insurance on home acquisition debt for their first or second residence. (Mortgage acquisition debt is generally for those who took on debt to buy or build their home. Home equity loans don’t qualify.)
2. The homeowner had to itemize on their tax deduction.
How Much Could The Mortgage Tax Deduction Save?
Those who are single or married and filing jointly and had gross incomes of $100,000 or less could write off all of their mortgage insurance premium payments. Depending on the value of the home, the homeowners’ credit score and the loan-to-value ratio, homeowners could save $500 to as much as $1,000, or sometimes even more for homes in high cost of living areas.
The expiration of this deduction last year made home ownership a bit more expensive, but now once again, the deduction helps make home ownership more affordable.
“David Stevens, who served as Federal Housing Administration commissioner and is now chief executive of the Mortgage Bankers Assn., says the loss of deductibility of mortgage insurance hits a segment of consumers — middle-income and first-time buyers — ‘where affordability is especially important’” (TrustYourLender.com).
Other Ways to Save
Remembering that this deduction is probably only temporary is important. While it will be nice if it is extended, it probably won’t be.
However, there are steps the homeowner can take to make the cost of buying a home more affordable such as waiting to buy a home until the requisite 20% down is saved. Of course, if you live in a high cost of living area where modest homes run $750,000 or more, saving 20% down is no easy feat. In this situation, some people rely on loans or gifts from family members to reach 20% down, though that is a personal decision.
The Mortgage Insurance Premium Tax Deduction is a sweet deduction that can save some homeowners as much as $1,000 a year. Reviving it for a year makes home ownership more affordable, but don’t get used to it as it is likely to expire at the end of this year.