Could Mortgage Insurance Deductions Bite the Dust?

The mortgage insurance deduction, which was passed to subsidize growing insurance costs in housing, may end in 2012.

The mortgage insurance tax deduction, a commonly-used feature that can save homeowners to the tune of hundreds of dollars a year, could be a thing of the past, according to a new piece by HSH.

First approved by Congress in 2006, the mortgage insurance deduction was first applied to loans in 2007, and was intended to encourage homeownership and address the general disconnect between the public and the increasingly skittish marketplace.

As HSH explains, prior to the housing crisis, mortgage insurance was not commonplace for borrowers. Instead of insurance, lenders instead would charge borrowers higher mortgage rates on little-to-no money down loans, and would use the extra funds from the higher rates to self-insure the loan. In the end, though, borrowers could still write off those additional funds at the end of the year with their taxes.

With credit tightening after 2007, though, mortgage insurance soon sprang up as a collateral on loans with less than 20 percent down, and the mortgage insurance deduction has since filled the void left by looser credit.

Though the year just started, and the insurance deduction will last throughout 2012, some interest groups are already beginning to lobby Congress to extend it beyond its original deadline. L. Gaye Torrance, for instance, of the Mortgage Insurance Companies of America, is framing the issue as beneficial for all homeowners.

“(I am) hopeful that Congress will address this issue in early 2012,” Torrance said. “The situation affects all low down payment mortgage borrowers, including FHA loans, which therefore impacts all homebuyers.”

But ultimately, HSH predicts that it will come down to politics.

“It’s likely that Congress will continue the mortgage insurance deduction if only because the political cost of cancellation is too great,” wrote Peter Miller for HSH. “That said, an extension of the write off still has not happened yet.”

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