Dear Tax Talk:
I heard that mortgage insurance premiums are deductible. I don't have mortgage insurance but I do have homeowners insurance. Can I deduct that instead of the mortgage insurance?
Mortgage insurance isn't the same as homeowners insurance. Homeowners insurance protects the value of the home and its contents. Mortgage insurance, also known as PMI, protects the lender. PMI is usually required when a buyer puts down less than 20 percent.
If the lender has to foreclose on your home one day and cannot recover the amount of outstanding debt, mortgage insurance will repay the lender the shortfall. In addition to charging you mortgage insurance, a lender may even ask for a higher interest rate on the mortgage loan.
Because the insurance coverage is essentially additional interest on the loan, many people would consider it additional interest paid on the loan. Congress must have felt the same way and decided that mortgage insurance is just the same as additional interest and a borrower should be able to deduct the premiums.
A limited exception was carved out for taxpayers whose adjusted gross income, or AGI, is below $110,000, which allows them to deduct as interest mortgage insurance. The deduction, recently extended through 2010, applies to mortgage insurance contracts issued on or after Jan. 1, 2007.
Because mortgage insurance policies are not usually reissued from year to year, the deduction benefits a limited number of taxpayers who have made recent home purchases. Homeowners insurance on a personal residence was never deductible, and that probably won't change any time soon.