Mortgage insurance tax break evaporates
WASHINGTON — Though its demise drew little attention because of the partisan year-end brawl over the payroll tax cut extension in Congress, a key mortgage financing benefit disappeared at the end of 2011: The ability of large numbers of homebuyers and owners to write off the premiums they pay for mortgage insurance.
The loss of that tax deduction — plus mandatory new fees imposed by Congress on all new conventional and FHA loans — could effectively ratchet up the costs of homeownership this year.
The expiration of mortgage insurance deductibility will hit many low-down payment conventional loans originated since 2007, plus virtually all new mortgages closed this year where the down payment is less than 20 percent. Industry experts estimate a range into the millions of existing owners and new purchasers potentially affected by the deductibility termination. Borrowers using guaranteed veterans (VA) and rural housing loans, where down payments can drop to zero, also are affected.
The change took effect Jan. 1 along with the expiration of 58 other tax code benefits that Congress failed to renew, including credits for home energy improvements, credits for builders of energy-efficient new houses and deductions for state and local sales tax payments. Congress could still reauthorize all or some of the write-offs retroactively this year, but the current political atmosphere raises doubts about that happening.
The mortgage insurance premium deduction allows purchasers and refinancers who use private mortgage insurance or federal insurance or guarantees, and who itemize on their federal tax returns, to write off their premiums.
In many cases, the post-tax savings for these borrowers are significant. New buyers with an income around $100,000 and a mortgage of $200,000 would save between $600 and $1,000 a year, depending on their credit score and loan-to-value ratio, according to MGIC, a private mortgage insurer. For households with lower incomes, the impact would be less, depending on their marginal federal tax brackets.
But there are other housing-related casualties from the pre-Christmas skirmishing. As part of the temporary extension of the payroll tax cut, negotiators tacked on a provision that raises fees on the majority of conventional mortgages — those originated for sale to, or guarantee by Fannie Mae and Freddie Mac. Starting in April, Fannie and Freddie will impose a surtax on the guarantee fees they charge private lenders equal to one-tenth of 1 percent. Lenders are likely to pass those fees to consumers in the form of a higher note rate or loan charges up front. Industry estimates suggest the surtax could add an eighth of a percentage point to rates and raise costs to borrowers over the life of the loan by more than $4,000 on a $200,000 mortgage.
Kenneth R. Harney can be reached at email@example.com.