Mortgage Insurance Premiums

by Mounica Kota | Mar 16, 2018 | Investment & Income

Mortgage Insurance Premiums

Mortgage insurance in the simplest of terms is the backup plan for a lender. In the unfortunate event that the borrower is unable to repay the loan, the lender can cash in the mortgage premium and recover the losses. However, there is more to it than what meets the eye. Here are some more details of this rather intriguing insurance and why you should opt for it.

What is it?

Statistics reveal that most home buyers pay less than 20% of the entire property cost as up front or commonly known as down payment. This leaves the lender at a bit of a disadvantage, should the borrower default due to some reason or the other. To overcome such situations, the Mortgage insurance is in place. One can usually find this insurance type on USDA and FHA type of loans. The insurance primarily reduces the risk that a lender takes by providing you with a loan.

This even takes care of certain situations where a borrower might not necessarily be eligible to get a loan of that magnitude. However, this does come at a cost and you must bear that cost. This is like an insurance policy for your mortgage. Since insurance has premiums, you need to pay for the same. These premiums also increase the cost of the overall loan. Most of the times, this insurance premium becomes a part of your monthly installments, thereby reducing its impact.

Does it qualify for Deductions?

As per the PATH or Protecting Americans from Tax Hikes act, you can seek for deductions for mortgage insurance premiums. The Congress put an end to the clause in the year 2015, but the same was extended for a year and was valid through 2016. This deduction is one of those ones that the Congress takes a close look at annually and takes a call whether or not to extend the benefits. The deduction is applicable to families with medium income and eventually nullifies as the earning bracket increases.

Which all loans do qualify for the deduction?

Assuming, that the Congress would extend the benefits of the PATH act, any mortgage loans taken on or after 1^st January 2007 qualify for the deduction. The deductions are applicable to first or second home or even home acquisition debt. One must not ideally use the second home for rent purposes. To qualify for the deduction, one must not earn any profits out of the second home. Any sort of refinance loans for the houses also qualifies for the mortgage insurance and its deductions.

Income Bracket

As mentioned earlier, the deduction is not applicable to anyone and everyone. Single tax payers with adjusted gross income of $109,000 and married filing separately tax payers with AGI of $54,500 cannot apply for this deduction. It is applicable for single tax payers with AGI less than $100,000 and $50,000 for tax payers who are married but file taxes separately. If you are not sure about your AGI, take a look at line 37 on your Form 1040.

How to claim the amount?

The amount paid towards mortgage insurance premium is present in Form 1098. As of now, there are no restrictions on the premium amount that you can claim for deduction. This essentially means, you can deduct the entire mortgage insurance premium. The insurance amount paid is itemized and must be mentioned in line 13 of Schedule A. As is the case with everything else, if you have opted for standard deductions, you cannot claim mortgage insurance premiums. But if the Congress doesn’t renew this clause, it might be worthwhile to relook into your mortgage insurance premiums.

Mortgage & Housing Deductions

by Mounica Kota | Dec 8, 2017 | Deduction & Credits

Mortgage & Housing Deductions

Mortgage and housing deductions have always been the most criticized and denounced policy of all times if you consider the opinion of economists. The recent tax reforms proposed by the Trump administration have again brought this issue into the limelight. So, we will straight off get into the discussion and try to understand what it is and what it does.

Deductions

In general deductions are those line items in your tax filing, which help you to reduce your tax liability. Individuals who own a house(s) can show the interest paid on their house mortgage as deductions and thus reduce the amount of taxes that they are supposed to pay. A lot of countries do not allow individuals to claim the interest on personal loans and thus mortgage interest deduction became more prominent. Though there are provisions of deductions, one must fulfill some criteria before being able to do so.

Eligibility

It is very important to itemize all the deductions that you want to be part of your tax filing process. Once it is done, you need to ensure that the itemized amount is more than the standard deductions, otherwise the benefits will not come into effect. The deduction is limited only to the interest paid on the mortgage and not the principal amount for the same. There is also a cap on the amount of money used as debt for the house.

The interest paid on the debt of the first million or $500,000 if you are filing separately is considered for the program. When it comes to home equity debt, the IRS considers only the first $100,000.

In order to invite or make it easier for more and more people to purchase houses, the tax code was reformed. Earlier, the tax code would allow interest paid for a personal loan to be exempted or called in as deductions, credit card debt also qualified for the same. It was later modified to remove personal loans and add interest incurred on home loans to be added as deductions. Given the time at which the modifications were done, the idea of having more people purchase houses just doesn’t fit. Simply because, back in 1913 people preferred buying houses with money up front than taking loans.

Changes to the tax code

The current government recently has proposed changes to the tax code when it comes to interest for mortgage and housing deductions. And a lot of experts in the real estate sector strongly believe that any modifications to the real estate sectors in that regards will shake things up. Many believe that the sector hasn’t completely recovered from the bubble that burst back in the year 2006. There have been several studies which suggest that allowing deduction of mortgage has not resulted in a direct increment in ownership of houses. In fact, it has resulted in an increase of property prices to a much larger extent, which again the real estate sector benefits from.

The availability of the tax cuts ensures that house buyers pay the effectively lesser price for their houses than what they had anticipated. This results in them willing to borrow an even higher amount for their houses for completion and addition of other things. This is the point where the loop begins and price associated with the house increase and so does the income opportunities of people that are involved with the business. Expensive houses do not necessarily highlight an economic growth in any form, as the spending is merely relocated. Thus, any changes to the tax code in relation to mortgage and housing deductions is sensitive, to say the least and must be dealt with a lot of care and intense thoughts.