For most American homeowners, the mortgage is the single largest bill to pay, and for the first few years anyway, consists of almost entirely interest on the loan, with very little of what you pay actually going toward offsetting the cost of the house. This is partly by design, so that banks can extract as much profit as possible out of you even if the costs turn out to be too much and you end up underwater or foreclosed on your loan – Wall Street gets your money AND the house, if that happens to you. After covering the down payment, closing cost, property tax lien and homeowners insurance policy, mortgage insurance is the last thing on your mind, and many new homeowners sign the dotted line without even realizing what they are paying for, or confusing it with the much more useful homeowners insurance.
Mortgage insurance, contrary to what you might believe, doesn’t help you in this situation (although it is possible to purchase yet another insurance policy that does cover for this, in limited circumstances such as loss of primary income, or a housing boom going bust badly enough that you owe more than the home is worth) nor does it protect against the mortgage lender going out of business in a bank run. Instead, it’s a fee, legally mandated in most states and on most loans due to the intense lobbying pressure applied by the mortgage industry, that insures the mortgage lender against you foreclosing on the house! Not what you had in mind, is it? Now that you know this, you probably realize that mortgage insurance premiums are a bill you would rather not pay, especially when you’re already paying off that high mortgage interest rate on your first dream home.
However, the United States federal government has a program that can help. While Congress has been reluctant to pass anything explicitly helping the middle class escape the ever-growing debt burden exacted by student loan financing, cost of medical treatment and subprime auto lending, just as there has been a relief program for student loan interest, there is now also a tax deduction for mortgage insurance payments.
The mortgage insurance premium deduction applies to any household with a mortgage on their first home, and adjusted gross income below $109,000 in the current tax year. Filing for it, like most income tax deductions, involves declaring it on Form 1040, in this case on Schedule A (unfortunately, this also means that you cannot use the abbreviated 1040-A or 1040-EZ to file this year), as well as turning in Form 1098, which should be provided by your mortgage insurance provider, usually your home mortgage lending company.
Another caveat in the mortgage insurance premium deduction is in prepaid mortgage insurance, which some banks have begun to demand as part of the mortgage closing cost, to provide (of course) the maximum benefit to themselves while raising an additional hurdle to the consumer. One might think, in this case, that it would be possible to deduct the entire cost of insurance, reducing the pain of having to pay as much as 7.5% of the value of the loan, but the IRS requires the home mortgage insurance deduction to be spread over a period of seven years or the term of the loan, whichever is shorter.
If you are eligible, though, and the total of your mortgage insurance premium and mortgage interest payments is over $600, you can deduct the entire amount against your taxable income, which for many homeowners is enough to provide a helpful February bonus when tax refund season comes along!