Friday, December 18, the President signed legislation that renews the tax deductibility of mortgage insurance premiums (MI) for qualified mortgage borrowers through 2016.
What is MI?
If your down payment is less than 20%, there is mortgage insurance. Most often, this is paid via a monthly fee, but you can also choose to pay it as an upfront lump sum, or half lump sum with a lower monthly fee. Another option is lender-paid MI where you take a higher interest rate in exchange for not having the fee.
MI protects the lender in case you default on your loan. In a moment, I will explain a new advantage for you, the home buyer.
How Long Does MI Last?
With a conventional loan, when you have 20% equity, you can ask your mortgage lender to drop the MI. Most FHA loans require MI for the life of the loan. If you have an FHA loan with enough equity, it can make sense to refinance into a conventional loan to get rid of the MI — especially if you can lower your interest rate and/or loan term at the same time.
Using MI as a Tax Deduction
If your adjusted gross income is not over $100,000, you may deduct all of the MI premium.
If your adjusted gross income is $100,000.01 to $110,000, then deductions are phased out at 10% increments for each additional $1,000 of adjusted gross household income.
A Silver Lining to MI: A Perk for Home Buyers!
One reason a lot of folks dislike MI is that it protects the lender, not them. (Although to be fair, MI enables you to buy a house with a small down payment.)
Now, there is an additional advantage! Some lenders — including myself — can offer you protection in case of job loss along with MI. This particular program will pay six months’ mortgage payments, up to $1,500/mo, if you are out of work. This is a lot of peace of mind, knowing that your mortgage won’t slide into default while you are between jobs. And even if $1,500 isn’t enough to cover your entire payment, it will go a long way toward making your payment so that your emergency savings account doesn’t tap out so quickly.
There is no payback whatsoever. Up to $9,000 will be paid toward your mortgage if you are out of work. It is not a loan; it is a true insurance benefit. This feature is for the first two years of home ownership.
Now that I’ve mentioned being a licensed loan officer, I am required to state my NMLS license number, which is 1284134. (CA, WA) Employed by Envoy Mortgage, a full service mortgage lender.
Thank you for reading my blog. If you have any questions, let me know.