New Tax Break
Builders who cater to entry-level buyers with moderate incomes have another tool available in 2007 to help make a home a little more affordable. Just before the 2006 holiday break, Congress passed legislation that allows homeowners with an adjusted gross income of $100,000 or less to deduct mortgage insurance premiums on their tax returns. The deduction phases out above that income level and is eliminated completely for those with incomes above $110,000.
Mortgage insurance typically is required by lenders when the borrower's down payment is less than 20 percent of the home's appraised value. In recent years, borrowers with less than a 20 percent down payment have increasingly bypassed mortgage insurance by taking out two loans—a primary mortgage for the first 80 percent of the loan and a secondary, or piggyback, mortgage, to cover the balance. The interest on the primary and the piggyback mortgages is deductible; mortgage insurance premiums were not.
But piggyback loans aren't problem-free. They're usually at a higher interest rate than the primary loan and they're adjustable, which means that buyers won't know what their payments will be later on. Plus, rising interest rates are making it harder for some moderate-income buyers to qualify for the piggyback loans, says Sue Stewart, president of Melbourne, Fla.–based MHI Mortgage, the financing arm of Mercedes Homes. That makes it valuable to have another option to offer customers. Her company is telling buyers about the tax deduction as one more reason to buy a home in 2007.
“We're pushing [the mortgage insurance tax deduction] as a home buying benefit,” she says. “All of us want a deduction from the IRS.”
For builders, the mortgage interest deduction gives their buyers another financing option, says Heather Howerton, director of the national builder division for GMAC Mortgage in Horsham, Pa. “Up to this point, no one wanted to do mortgage insurance,” she says. “It was the white elephant in the corner that no one wanted to talk about.”
The biggest drawback is that, for now, it's only a one-year deal. Congress only approved the deduction for mortgages that are taken out in 2007, and the deduction can only be taken on the buyer's 2007 tax return. Even if a buyer pays for the policy in advance, he can only deduct the portion that's applicable to the current tax year, says Phoenix-based CPA Sandy Abalos. The only exception is for qualified mortgage insurance issued by the Veterans Administration or the Rural Housing Agency, she says.
It's not unusual for Congress to do a deduction on a one-year basis, and then assess the impact, says Glen Corso, group senior vice president for Walnut Creek, Calif.–based The PMI Group, one of the country's largest mortgage insurance providers. “We are hopeful that the reasons for [the deduction] will be just as strong then as they are now and they'll see fit to renew it,” he says.