If you're in the market for a house, but you're worried about the down payment, a new federal tax deduction may be just the thing to ease your mind a little.
Next year, homebuyers can take an itemized deduction for the cost of private mortgage insurance on their personal residences. So far, it's available only in 2007 for mortgage contracts issued beginning next year. Keep an eye on your elected representatives to see if they decide to keep it around longer.
This change adds one more item to the list of tax deductions that come along with homeownership. If it wasn't enough of a joy to fix your own plumbing and mow your own grass, you also have plenty of financial incentives to own your own abode.
Mortgage insurance can be the bane of first-time homebuyers who may not have much money for a down payment. Traditionally, lenders want to see a prospective purchaser put down 20% of the home's purchase price. That can be a large chunk of cash for anyone to save, making homeownership seem like a dream that will never quite come true.
Lenders will typically accept less than a 20% down payment if the borrower takes out private mortgage insurance. This protects the lender in the unlikely event that you default on your loan. Experience has proven to mortgage lenders that borrowers whose home equity is less than 20% are statistically more likely to default. Don't take it personally. They don't know you have truly persnickety bookkeeping habits.
Mortgage insurance is costly, and it sounds like a bad deal for homebuyers. Keep in mind that its existence means lenders can loan more money to people with smaller down payments who might have otherwise been turned away. (Lenders also have some ways to get around the need for mortgage insurance, so check around if you're shopping for a new home.)
This new tax deduction can cut the cost of mortgage insurance for homebuyers who must purchase it. It can be claimed by homeowners with incomes under $100,000. Make up to $110,000 and you'll be permitted to deduct part of your mortgage insurance. Any more than that and, unfortunately, you're out of luck on this one.
If you do qualify, you can add this new private mortgage insurance tax deduction to the other tax breaks on the homeowner's handy guide to itemized deductions. Homeowners can also claim deductions for mortgage interest and property taxes. You may also be eligible to deduct interest paid on home equity loans of up to $100,000.
For many people, this list adds up to more than they could otherwise deduct and can mean lower taxes. Read this primer by Foolish tax guru Roy Lewis if you want to take a stab at calculating your tax savings.
Unlike your mortgage, which you'll probably pay for decades, private mortgage insurance can come to a relatively quick end. You can usually cancel it when you have at least 20% equity in the value of your home. You'll have to talk to your lender for more details, but you'll usually be required to get an appraisal of the property. This may be a little costly, but it could also save a bundle in insurance payments.
If you're in the market for a home but completely flummoxed by all this talk of insurance, deductions, and interest, browse through the Home Center. It will walk you through the entire process of shopping for, buying, and maintaining that dream home.
When you're ready, crunch some numbers on our Foolish home calculators. There's even one that can show you roughly how much you'll pay in mortgage insurance if your down payment amounts to less than 20% of your dream home's price tag.
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Fool contributor Mary Dalrymple welcomes your feedback.