New Tax Deduction Created For Mortgage Insurance

Mortgage insurance will be tax-deductible in 2007. For some homeowners, the new law means it will cheaper to get mortgage insurance instead of getting piggyback loans.

The 109th Congress passed the tax law in its final hours. Hundreds of thousands of homeowners will save a total of $91 million when they file their tax returns in 2008, according to estimates prepared by the mortgage insurance industry.

Bottom line for consumers: Don't get a piggyback loan without taking a serious look at mortgage insurance, because mortgage insurance is likely to be cheaper in the long run, and it might even cost less in the short run.

According to an analysis by Bankrate, a homeowner with a $180,000 mortgage would save about $351 in taxes per year because of the law. That assumes that the borrower has good credit and is in the 25 percent tax bracket.

The tax deduction applies only to mortgages that are closed in 2007. If you have a loan with mortgage insurance in 2006, you won't be able to deduct the premiums in the 2007 tax year unless you refinance in 2007.

There are income limits. You get the full deduction if your adjusted gross income is $100,000 or less. The amount you can deduct phases out rapidly after that, and no mortgage insurance deduction is available if you make more than $110,000.

This is a one-year deal, and Congress would have to renew the deduction to make it apply for the 2008 tax year and beyond. Congress probably will extend the deduction, but you can't know for sure.