As if home financing isn’t complicated enough, The Tax Relief and Health Care Act of 2006 included new tax code for homeowners.

The act grants itemized deductions for private mortgage insurance (PMI) and government mortgage insurance (MIP) expense premiums paid in 2007.

For all loans “started” in the 2007 calendar year, mortgage insurance is tax-deductible provided that two tests are met:

1. The homeowner’s household income is $100,000 or less in 2007
2. The home loan is for a primary or secondary residence

For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000

So, if a single person earns $90,000 in 2007 and buys a home using MI, the MI expenses are tax-deductible in 2007.

However, there’s a catch!

Because the new tax code is due to expire December 31, 2007, there is no guarantee that the MI will be tax-deductible in 2008.

Until the tax code changed, mortgage insurance was a relatively expensive financing option when compared to second mortgages (i.e. home equity loans, home equity lines of credit). As the market for second mortgages dries up, though, the playing field is leveling.

There are plenty of examples in which mortgage insurance is a more cost-effective route than taking a second mortgage.

A full analysis should be performed to determine which home loan products are best for you, especially considering the “temporary” status of the tax break. The deduction applies to conventional, FHA, and VA loans.

This entry was posted on Monday, September 24th, 2007 at 3:50 pm and is filed under Cincinnati Real Estate News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.