Will borrowers be able to deduct their mortgage insurance when tax time rolls around? It’s complicated…
First off, let’s make one thing clear: we’re PMI Rate Pro, not Tax Deductibility Pro. Mortgage insurance is our thing, taxes less so. Still, there’s some history we can share, and we can gaze into our crystal ball and look at what the future might be like.
Demystifying mortgage insurance and tax deductions: a trip down memory lane
To understand what’s happening, we must travel back to 2007.
Back then, people were engaging in some ill-advised behavior – and we’re not talking about tattoo choices. The ill-advised behavior was purchasing a house using a piggyback instead of mortgage insurance.
What’s a piggyback? It’s when you put down less than 20%, but instead of getting mortgage insurance, you use a second mortgage to have enough funds to avoid buying mortgage insurance. We won’t go into all the ways this could, and did, go wrong for borrowers – that’s a topic for another day. Piggybacks did have an advantage over mortgage insurance in one regard: the interest on your piggyback was tax deductible.
This proved to be an unfair situation.
One way around it was to have the lender pay for the mortgage insurance, also called LPMI. While there are pros and cons to using LPMI, the fact remains that traditional borrower-paid still factored into the APR calculation and was part of the cost for mortgage credit.
Thankfully, tax law changed and mortgage insurance became tax-deductible – at least for borrowers filing jointly with an adjusted gross income of $100,000 or less ($50,000 if single or filing separately). The end.
Except that it wasn’t.
The tax deduction for mortgage insurance wasn’t permanent. It had an expiration date, and every time the tax deduction got extended, the date remained. This sort of worked.
Today’s landscape: stalled legislation, new proposals, and the income limit challenge
Now let’s fast forward to the present day. MI was not tax deductible for the 2022 tax year, and if things remain the same, it won’t be for the 2023 tax year. If we go back to 2021, we see the first significant attempt to fix the situation. The Middle Class Mortgage Insurance Premium Act of 2021 was introduced, which would double the income limits and make the tax deduction permanent.
As you might guess, it didn’t become law. And neither did the Middle Class Mortgage Insurance Premium Act of 2022.
Earlier this year, the Middle Class Mortgage Insurance Premium Act of 2023 was introduced, but it didn’t appear to make any progress. But then in early June something funny happened.
Representative Julia Brownley introduced the Mortgage Insurance Tax Deduction Act of 2023. It would make the mortgage insurance tax deduction permanent but doesn’t change the income limits.
Meanwhile, Senators Hassan and Tillis introduced the Middle Class Mortgage Insurance Premium Act of 2023. This is the same piece of legislation that has previously stalled out, which changes the income limit and makes the deduction permanent.
So how big of a deal is the income limit? As it turns out, $100,000 in 2007 is the equivalent of over $146,000 in 2023. In 2007, the conforming loan limit was $417,000, compared to $726,200 in 2023.
Clearly, the $100,000 income limit is problematic.
What happens next? How do the differences in the bills get sorted out? Schoolhouse Rock! provides a helpful introduction to the process.
Seeking solutions amid uncertainty
Ideally, we’d see this deduction reinstated, along with an income limit that makes sense in the current housing market. It’s tough to say whether this will happen, because although Congress could act on these bills on a standalone basis, they probably won’t. The best path for either piece of legislation would be to hitch a ride on something bigger. In the meantime, we’ll be sure to monitor the situation.
Even if your borrowers aren’t in line to get a tax deduction for their mortgage insurance, you owe it to them to ensure they get a good deal on their mortgage insurance. That’s where we come in. Not only do we make the process quick and easy, but comparison shopping could save your borrowers more than a tax deduction would. Even if you have a preferred MI, our risk allocation ability allows you to balance your desire to send them a large portion of your business with getting a great deal.
While we wait for Congress to act, now’s the time for you to save money for your borrowers while saving time. Be sure to reach out, and we can schedule a demo to show you the power of our platform.
About PMI Rate Pro: PMI Rate Pro is a cutting-edge technology company hyper-focused on PMI. Our Pricing Engine delivers prices from all 6 MI providers across 5 standard insurance products, all with a single click of a button. The quotes can be displayed in order by best price, or in order based on our risk allocation algorithm. PMI Rate Pro has two products: MIQuote – Web application that quotes PMI and MIPrice- API product that is a pricing engine.