Mortgage insurance makes the American dream achievable for borrowers who do not have the ability to save the traditional 20% downpayment. Millions of borrowers rely on mortgage insurance every year to access homeownership, with nearly 80% of first-time homebuyers making their purchase with a low downpayment mortgage. But a crucial tax break for people with mortgage insurance expired last year. Lawmakers are now weighing whether to renew this tax-relief measure.
Mortgage insurance makes homeownership more accessible to consumers by providing an option for purchasing a home for as little as 3% down. In 2021, the private mortgage insurance industry helped nearly 2 million borrowers, according to the U.S. Mortgage Insurers (USMI) trade association. Sixty percent of these people were first-time homebuyers and 40% had incomes below $75,000.
It could take 21 years for a household earning the national median income to save 20% down plus closing costs for a median-priced single-family home, according to a report released by USMI in 2021. This delay hurts families by leaving them on the sidelines in building equity and wealth while still paying monthly rent.
For the lender, mortgage insurance provides the credit enhancement needed to expand homeownership opportunities to a broader range of borrowers. This helps keep interest rates lower and expands the available market for lenders. In turn, this benefits potential buyers who otherwise might not be able to get a mortgage.
Historically, homeownership has been one of the best ways to build long-term wealth. Lawmakers recognized this and passed tax incentives for people to invest in a home. Interest paid on a mortgage is deductible (up to the first $750,000 of indebtedness), which for most people is the largest deduction they can claim each year.
Following the Great Recession, Congress also passed temporary tax relief to make the premiums paid on mortgage insurance deductible. The rationale was that mortgage insurance premiums are equivalent to mortgage interest. In other words, premiums paid for mortgage insurance should be included in the cost of borrowing money and should get the same treatment as mortgage interest.
The tax deduction for mortgage insurance has been extended several times and is a major benefit to low- and moderate-income homeowners. This tax provision has a proven track record of helping middle-class families. Now is the time to make mortgage insurance permanently deductible.
Genuine need
Congress often enacts temporary tax provisions, almost all of which are tax cuts. Some are made temporary to force a review when they’re scheduled to expire or “sunset.” Others are temporary because Congress intended them to address temporary needs, such as a recession, mortgage market collapse or regional weather disasters. There are roughly 30 tax extenders currently on the list to be renewed, and mortgage insurance is one of the few that impacts individuals instead of corporations.
In an effort to reform and reduce the number of tax extenders, tax writers have begun to analyze the list to determine which extenders should be made permanent, which should be phased out and which should be eliminated. Mortgage insurance premium deductibility has extensive benefits to homebuyers and consequently should be made permanent.
There has been support for making mortgage insurance payments deductible for nearly two decades. Congress originally introduced a bill in 2003 that had more than 220 co-sponsors. The bill that was ultimately passed and signed into law as a temporary tax provision in 2006 had more than 175 co-sponsors, demonstrating that this provision has always had bipartisan support. The deduction was first allowed in 2007.
At the time, the justification for the deduction of mortgage insurance premiums was to promote homeownership and assist in the recovery of the housing market following the Great Recession. Through the bill, mortgage insurance premiums paid on private loans, as well as government-insured loans through the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture, are deductible.
Currently, of any of the individual extenders, the mortgage insurance deduction has one of the best distributional profiles as a substantial number of homeowners with annual incomes of less than $75,000 receive the break, according to USMI. The benefits these borrowers see include lower downpayments and tax write-offs that can help offset rising interest rates.
This is good for the average American and there is a genuine need for this deduction to become permanent. With housing prices at an all-time high, incentives for purchasing a home without 20% down keeps the market more accessible for first-time buyers and those in lower tax brackets. The impact of this tax relief over the past 14 years has been significant. Last year, USMI reported that nearly $1.4 trillion in outstanding mortgage debt had private mortgage insurance coverage.
Permanent benefit
Although the tax deduction for mortgage insurance technically expired last year, legislators are working to make it a permanent benefit due to its popularity and its proven ability to help millions of Americans. This past December, Ron Kind, D-Wis., and Vern Buchanan, R-Fla., introduced the Middle Class Mortgage Insurance Premium Act.
Earlier this year, Sens. Margaret Hassan, D-N.H., and Roy Blunt, R-Mo., introduced the same legislation in their chamber. If passed, this bill would make the deduction permanent and raise the income cap to make it accessible to more homebuyers. This and the other tax extenders are expected to be taken up at the end of the year after the midterm elections.
The purpose of raising the income cap is to recognize the impact of inflation in the 15 years since the tax deduction went into effect. Since 2007, the deduction has been limited to taxpayers below certain income levels and begins to phase out at adjusted gross income of $100,000 for joint filers. These levels have never been adjusted despite the cumulative impact of inflation over time. The proposed legislation would adjust the income limits to $200,000 (or $100,000 for individuals and married couples who file separately).
According to the IRS, approximately 1.4 million households claimed the mortgage insurance deduction in 2019, equating to an average tax deduction of nearly $2,100. That year, the impact was strongest on middle-class households, with nearly 60% of taxpayers who claimed the deduction reporting an income of less than $75,000.
Mortgage insurance is more frequently used by younger, first-time and minority homebuyers who often lack the resources for large downpayments, according to USMI. A reported 80% of first-time buyers in recent years purchased their home using low-downpayment loans. Finally, USMI noted that borrowers using government mortgage programs, who generally have lower incomes, have similar reliance on mortgage insurance. Eighty-five percent of FHA borrowers and 50% of VA borrowers who utilize mortgage insurance are first-time homebuyers.
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Mortgage insurance is a significant driver of affordability when it comes to homebuying, and this tax-deduction benefit makes homeownership even more attainable. There is a true need for Congress to make it a permanent fixture. The next step is to continue working with government officials to further the push for a permanent deduction, which will assist millions of Americans in securing affordable homeownership options. ●
