My Mind on Mortgages

With so many homebuyers utilizing FHA mortgage financing in the past year I’m guessing many will have questions related to the tax deductibility of mortgage insurance premiums.  Before I jump into detailed tax information let’s do a quick refresher.  I also need to tell you that I am not a licensed tax professional.

What is mortgage insurance?

Mortgage insurance is a required coverage that homebuyers must provide for the lender when they buy a home and have less than 20% for a down payment.  With FHA mortgages insurance is paid in two forms.  First, the homebuyer finances an upfront mortgage insurance premium equal to 1.75% 2.25% 1.00% of the base loan amount.  In addition, they make a monthly mortgage insurance premium payment with their monthly payment.

Is mortgage insurance tax deductible?

Under the current tax code the monthly mortgage insurance premiums are entirely deductible for households with adjusted gross incomes (AGI) of less than $100,000.  AGI’s greater than $100,000 are subject to phaseouts.  The upfront mortgage insurance premiums which typically get financed into the loan (FHA, VA, and USDA) are pro-rated based on the lesser of the term of the loan (i.e. 30 years) or 84 months.

What other information is important to know?

There are some other important details.  I’d encourage you to review the IRS’s publication 936.  For example, in order to qualify for this deduction the mortgage insurance policy must have been established after 2006 and it must have been established on “acquisition indebtedness“.  The deductibility of mortgage insurance premiums is set to expire after 2010.