Adding complexity to the home financing process, The Tax Relief and Health Care Act of 2006 includes 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 originated in the 2007 calendar year, mortgage insurance is tax-deductible provided that two tests are met:
- The homeowner’s household income is $100,000 or less in 2007
- 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 an 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 and before Prime Rate reached 5.25%, MI was a relatively expensive option versus using a second mortgage to help finance a home. Now, the playing field is somewhat leveled for comparison purposes. There are plenty of examples in which MI is a more cost-effective route than a home equity loan and the opposite is true, too.
A full analysis should be performed to determine which course of action is best for you, especially considering the "temporary" status of the tax break.