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Mortgage insurance tax break makes little sense

When she heard about a new tax break for homeowners with mortgage insurance, Kathryn Considine was delighted.

"I thought if I could deduct what I paid this past year, that would be great," she said. Considine, who does business consulting, paid $55 a month last year for mortgage insurance on her Pinellas Park home.

But she won't get the tax deduction and neither will you - unless the premiums you pay are for a mortgage you take out this year. And even if you qualify, the deduction is good for only one year.

The mortgage insurance deduction, part of the last-minute tax bill Congress passed in December, turns out to be another example of tax policy gone amok.

Here's a little background: To reduce their risk of losing money, mortgage lenders usually require mortgage insurance if you put down less than 20 percent of the purchase price of a home. It pays off if you default. The drawback: The premiums increase your mortgage payment, typically by $50 to $100 a month. However, many homebuyers get around this requirement with a piggy-back deal - an 80 percent first mortgage paired with a 20 percent home equity loan or credit line at a higher interest rate. This pairing became very popular when short-term interest rates were low, causing a drop-off in business for mortgage insurance companies.

The industry's solution was to lobby Congress to make premiums deductible, calling for a more level playing field. Groups interested in making home ownership more affordable supported the effort.

"We are pleased that policymakers have recognized mortgage insurance as a cost of finance just like mortgage interest," said Suzanne Hutchinson, executive vice president of the trade group Mortgage Insurance Companies of America. The association says as many as 2-million families will be buying or refinancing an insured mortgage next year and be eligible for the tax break. To qualify, their incomes must be less than $110,000 a year (phased out between $100,000 and $110,000.). A refinancing cannot be for more than the original loan on the home.

Unfortunately, this new deduction flunks a basic fairness test.

Why should 2-million families who take out new mortgages get a tax break while millions of others paying mortgage insurance premiums do not? And why should mortgage insurance get better tax treatment than property insurance, which also is required by mortgage lenders and is much more costly?

The arrangement also flunks a common-sense test. No deduction should be added to the tax code for just one year, especially one that is complicated to apply, with its income phaseout.

So why did we end up with what we did? An unfair bill that expires after one year costs a lot less than one that's more comprehensive and becomes a permanent part of the tax code. As it is written, the cost to the government is just $91-million in lost tax revenue. But of course that's a misleading number because the next lobbying effort will be to extend it.

"It was a good way to get the deduction on the books without having to get into how this will impact the federal budget beyond one year," association spokesman Jeff Lubar said. At least he's honest.

While I dislike the way our representatives write tax law, I'm all in favor of taking advantage of what they give you. If you're buying a home this year with less than 20 percent down, you should compare a mortgage with insurance to a pair of piggyback loans. Calculators on Web sites, such as www.mtgprofessor.com, can help you run the numbers. One advantage of using insurance is that you can drop it when you've built up sufficient equity. In fact, that's what Considine now has done.

Question: When I die, will my children be responsible for any credit card balance and an unsecured loan?

Answer: Your estate is responsible for your debts, but your children should not have to make up any shortfall, assuming they were not co-signers or authorized users of the cards.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, write hhuntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731. Read more questions and answers at http://blogs.tampabay.com/money

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