Did you know your mortgage insurance may be deductible? Under certain conditions, the Internal Revenue Service (IRS) reports that homeowners may deduct their mortgage insurance premiums when filing their federal tax returns.
Generally, mortgage insurance premiums paid to a government agency or program as well as private mortgage insurance (PMI) premiums connected to the purchase of a taxpayers primary residence is deductible as long as the taxpayer itemizes their deductions. Taxpayers who make monthly payments may deduct all or a portion of the amount paid depending on their income. Homeowners who made a lump sum mortgage insurance premium payment at the time of purchase may be eligible to deduct a portion of the premium provided the mortgage insurance covers the tax year for which they are filing a return. The amount of the deduction is limited if the taxpayer’s adjusted gross income exceeds $100,000 ($50,000 if married and filing separately). Taxpayers whose gross adjusted income exceed $109,000 or $54,500 if married and filing separately may not deduct mortgage insurance premiums. Taxpayers should follow the instructions and use the worksheet for Schedule A, Line 13 to figure their mortgage insurance deduction.
It is important that taxpayers understand that mortgage insurance is NOT the same as homeowners insurance. Mortgage insurance is taken out when a new mortgage is approved. The amount varies depending on the value of the house and the amount of the down payment. Unlike homeowners insurance, which protects the property and investment of the individual(s) owning and living in a residence, mortgage insurance or PMI protects the lender’s investment. Neither mortgage insurance nor homeowners insurance are required by law, however, either (or both) may be required by lenders as conditions of a loan. Homeowners need to read their loan documents carefully to determine and understand the requirements for their specific loan.
Mortgage insurance and PMI generate very few complaints, according to the National Association of Insurance Commissioners (NAIC). The Closed Confirmed Consumer Complaints by Coverage Type Report published by the NAIC at the end of February 2009 indicates that only a single complaint was lodged against PMI in 2008 and 2006. None were reported in 2007 and none have been filed so far in 2009. Complaints regarding mortgage guaranty insurance were also low with eight complaints recorded in 2008, 11 in 2007 and 13 in 2006. Only one mortgage guaranty complaint has been recorded so far in 2009. Homeowners insurance, however, generates an average of more than 1,000 complaints per month.
Some experts believe mortgage insurance and PMI have contributed to the current mortgage crisis. Lenders approved risky loans, and allowed those loans to go into foreclosure rather than modifying them because their investment was protected by mortgage insurance. As the number of foreclosures increased, so did the number of mortgage insurance claims. Insurance companies and others issuing mortgage insurance quickly found they were paying out as much or more mortgage insurance claims than they were bringing in through mortgage insurance premiums to the point that the losses threatened their viability as a commercial enterprise. For instance, in the case of AIG, the insurance giant needed the bailout funds in order to pay all the mortgage insurance claims being made while still remaining in business.
â€œI am not entirely against having the government secure loans or requiring homeowners to pay PMI on certain mortgage loans. Up to this point, these programs have helped more people achieve the American Dream of Homeownership,â€ said Ralph R. Roberts, a consumer advocate, host of KeepMyHouse.com, author and spokesperson for Federal Loan Modification Law Center, who calls for the elimination of PMI as a means of helping homeowners keep their homes and stimulate the economy. â€œHowever, when these same programs are working against homeowners during an unprecedented economic crisis, I think it is time to review the real purpose of these programs. Lenders need to start relying less on mortgage insurance and more on loan more on loan modification to mitigate their losses and help more Americans keep their homes.â€
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