What is a Qualified Mortgage Insurance Premium (MIP)
Qualified mortgage insurance premiums (MIPs) are paid by homeowners who take out Federal Housing Administration (FHA) loans. Until the 2017 Tax Cut and Jobs Act, qualified mortgage insurance premiums were deductible in addition to allowable mortgage interest. Tax laws change each year and they may not currently be deductible.
BREAKING DOWN Qualified Mortgage Insurance Premium (MIP)
Federal Housing Administration lenders use qualified mortgage insurance premiums (MIP)as a tool to protect themselves against higher-risk borrowers. Since FHA loans can be had with a down payment of as little as 3.5%, and with a credit score as low as 500, these loans are default frequently.
FHA mortgages require every borrower to have mortgage insurance. Conversely, conventional loans only need private mortgage insurance (PMI) policies if the downpayment amount is less than 20% of the property's purchase price. Each FHA loan requires both an upfront premium, of 1.75% of the loan amount, and an annual premium of 0.45% to 1.05%. Payment of upfront premiums is at the loan issuance. Determination of the exact yearly cost comes from the term of the loan, amount borrowed, and loan-to-value ratio.
Each month, the loan's payment amount will reflect the annual premium divided by 12 months along with the principal payment. Other charges usually added to the monthly fee include escrow amounts for property taxes and homeowner's insurance coverage.
Canceling Qualified Mortgage Insurance
Using a conventional loan, the buyer may cancel the PMI once paying 20% of the loan's value, or after the loan is 11 years old. However, the FHA may not allow you to take this reduction. It will all depend on the date you took out your loan.
- Between December 31, 2000, and July 3, 2013, if you have paid at least 78% of the loan-to-value (LTV) amount off, you may ask the lender to cancel the MIP.
- After July 3, 2013, if you made a downpayment of less than 10% of the home's value at loan origination, you must pay the MIP for the life of the loan. The only way to remove the qualified mortgage insurance (MIP) on an FHA loan is to refinance it into a non-FHA product.
Borrowers who can qualify for a conventional loan, even if they will pay private mortgage insurance, should also look at FHA loans, to see which will be the better deal. Those with lower credit scores may do better with an FHA mortgage, though, especially if they can make a 10% downpayment. Also, some lenders may be able to provide a separate loan to cover the downpayment amount. Be sure to talk to your tax accountant, financial advisor, and your bank to see which loan makes the best sense for your situation.
Tax Implications of Qualified Mortgage Insurance Premiums
Every year, your lender is required to send Form 1098 Mortgage Interest Statement to both you and the IRS. This form lists your mortgage payments over the past year and can affect your income taxes. The total amount of the MIP or PMI premiums will be in box 5 of the form. To claim a deduction for either type of mortgage insurance, you must itemize your deductions using Schedule A under the interest paid section.
The deduction for these premiums had expired on Dec. 31, 2017, thanks to the passage of the Tax Cuts and Jobs Act of 2017. However, after public outcry, President Trump signed the Bipartisan Budget Act of 2018, which included 30 tax extensions, retroactive to the 2017 tax year. Mortgage insurance premiums were one of the extended items.
Whether the deduction will be available for 2018 tax filing season remains to be seen. H.R. 109 to make the deduction permanent is currently sitting in the House Ways and Means committee. Congress would need to act to reauthorize it.
For now, mortgage insurance premium payments are not deductible. But even when they were deductible, not everyone could take them. The deduction for qualified mortgage insurance premiums (MIP) depended on both of filing status and adjusted gross income (AGI). It reduces by 10% for every step over the allowable borrower's AGI limit. It disappears entirely for those earning over $54,500, or $109,000 for joint filers.
(Learn more about mortgage insurance at Investopedia's What is Mortgage Insurance?)