Towards the conclusion of 2012, there were significant concerns over the looming Fiscal Cliff and the potential expiration of the tax cuts from the Bush era. Yet, Congress intervened in the nick of time, extending many of these tax cuts and alleviating taxpayer worry.
A significant segment of homeowners, still smarting from the expiration of the Mortgage Insurance Premium Tax Deduction that took place on January 1, 2012, will be thrilled to find out that this deduction is back. This short-term tax relief measure, initially introduced in 2007 and only lasting four years, has been reinstated and will stay in effect until December 31, 2013. However, most forecasts don’t predict another extension.
What does the Mortgage Insurance Premium Tax Deduction encompass?
Typically, when purchasing a home with less than 20% down payment, buyers are required to pay mortgage insurance, frequently known as private mortgage insurance (PMI). This will be an ongoing expense until the homeowners officially own 20% of their property.
This tax deduction existed to ease the burden for home buyers who had taken out low down payment loans and found themselves subject to PMI premiums. However, this deduction only applied under specific conditions: homeowners had to incur the mortgage insurance on home acquisition debt for their primary or secondary residence, and they were required to itemize this expense on their tax deductions.
What savings could come from the Mortgage Tax Deduction?
For singles or married couples filing jointly, with gross incomes of up to $100,000, this deduction allowed the full amount of PMI premiums to be written off. Depending on several variables like the property’s value, the homeowner’s credit score and the loan-to-value ratio, savings ranged from $500 to $1,000 or more, especially for homes in high cost of living areas.
The deduction’s expiration last year made homeownership somewhat costlier, but its revival once more makes home-owning more affordable. Federal Housing Administration commissioner and Mortgage Bankers Assn. chief executive, David Stevens, maintained that mortgage insurance’s non-deductibility particularly impacted middle-income and first-time buyers, noting that “affordability is especially important” for this demographic.
So what does this mean for homeowners?
Though the deduction’s revival is welcome, its continuation is not certain. Hence, homeowners should consider additional strategies, like saving for a full 20% down payment, to make home ownership more affordable. This can be a challenge in high living cost areas where even average homes can cost upwards of $750,000. To reach the 20% down payment target, some people might consider accepting loans or gifts from family, though this is a personal choice.
In summary, the Mortgage Insurance Premium Tax Deduction is a valuable perk that can potentially save homeowners up to $1,000 annually. Its revival for a year makes homeownership more affordable, but borrowers should still prepare for the likelihood of it expiring at the end of this year.
