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March 16th, 2012

Is mortgage insurance tax-deductible?

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Mortgage and down paymentMortgage insurance is required for all FHA and conventional mortgages that have down payments less than 20 percent of the purchase price. Homeowners who are refinancing may be surprised to find out that they too need to pay mortgage insurance if they have less than 20 percent equity in their home.

Does mortgage insurance hurt my chances of a HARP refinance?

The point of mortgage insurance is to protect the lender if a borrower should default on the loan. While many homeowners complain about the need to pay mortgage insurance, this safety net enables more lenders to approve loans with lower down payments.

Mortgage insurance payments and taxes

There’s good news and bad news. The good news is that you can deduct the mortgage insurance you paid in tax year 2011 (taxes due by April 17, 2012). The bad news is that the deduction expired at the turn of 2012, and unless it is renewed or revived by Congress, you will no longer be able to deduct it going forward. This will mean a fair-sized tax increase for many homeowners.

The IRS allows homeowners who pay mortgage insurance in connection with a home acquisition to deduct the premiums from their taxes along with their mortgage interest payments. In order to be tax-deductible, the mortgage insurance contract must have been issued after 2006.

If you are paying mortgage insurance, this should be reported to you annually by your lender on Form 1098, the same form that is used to provide a statement of the mortgage interest paid during the previous year.

Mortgage insurance deductibility limits

The deductibility of mortgage insurance payments is limited by income. If your adjusted gross income is more than $109,000 (or $54,500 if married filing separately), then you cannot deduct your mortgage insurance premiums at all. If your adjusted gross income is between $100,000 and $109,000 (or between $50,000 and $54,500 if married filing separately), the amount of your mortgage insurance premiums that otherwise might have been deductible is reduced and may even be eliminated.

Some homeowners prepay their mortgage insurance rather than making payments on a monthly basis. In this case, you must allocate the paid premiums over the shorter of either the loan term or 84 months, beginning with the month the insurance was obtained.

For complete details about taxes and mortgage insurance, check IRS Publication 936.

Michele Lerner contributed to this post.

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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