Law gives 2007 home buyers first-ever federal tax
Home buyers have something new this spring to factor into their home financing calculations: A new federal tax deduction allows many qualified families to write off premiums for private and government mortgage insurance on loans that close in 2007.
This is the first time that homeowners who have low down-payment loans with mortgage insurance will be able to deduct the cost of their mortgage insurance premiums. The average annual tax savings for qualified families will be between $300 and $350.
The new deduction, passed by Congress and signed into law by President George W. Bush late last year, is effective for the 2007 tax year.
Under the new law, private mortgage insurance (PMI) premiums are now fully tax deductible for borrowers who buy or refinance a home this year if their adjusted gross income is $100,000 or less. Families with incomes of more than $100,000 and up to $109,000 will be eligible for a reduced deduction.
“Making the cost of mortgage insurance tax deductible helps those who need it most — low- and moderate-income Americans, primarily first-time home buyers, who are financially responsible but simply don’t have the means to amass a 20 percent down payment,” said Steve Smith, chief executive officer of The PMI Group Inc. and president of Mortgage Insurance Cos. of America (MICA).
The tax change to give a deduction for mortgage insurance comes at a time of changing real estate market conditions and regulatory warnings about the risks of exotic loans.
Mortgage insurance plays a crucial role in maintaining the stability and continued health of the mortgage finance system. With rising interest rates and slower appreciation of home prices, many people who used exotic loan structures are being surprised with higher monthly payments.
Compared to other financing options, a mortgage loan with PMI is often more affordable, and its fixed, predictable premiums provide consumers with peace of mind — and now a tax deduction. And PMI is cancelable once the homeowner has built up enough equity in the home.
PMI premium prices vary based on the size of the down payment, type of mortgage and amount of insurance coverage. The cost of PMI for a median-priced home — the projected national median price in 2007 for a single family home is $224,500 — ranges from $50 to $100 per month.
“This new tax deduction will make loans with private mortgage insurance even more attractive for home buyers who are on the cusp of homeownership,” said Suzanne Hutchinson, MICA’s executive vice president. “The wide-ranging group of organizations that support this important tax break will certainly be working to extend the deduction beyond 2007.”
Some consumer groups have praised the new law as well.
“Homeownership contributes substantially to social stability,” said Bruce Hahn, president and chief executive officer of the American Homeowners Grassroots Alliance. “Yet homeownership remains just beyond the grasp of millions of Americans. Making the cost of mortgage insurance tax deductible helps put homeownership within reach for many more families.”
Tax day in April 2008 — when taxes are filed for 2007 — could bring new benefits to qualified home buyers who will buy or refinance homes this year with tax-deductible private mortgage insurance.
“This tax deduction will create important social benefits by offering relief to overburdened taxpayers,” said John Berthoud, president of the National Taxpayers Union. “Finally, homeowners will have the ability to make all the costs associated with the ongoing financing of their home truly tax deductible.”
This article was provided courtesy of ARA content.