When borrowing money to buy or refinance a home, most lenders require you to make a down payment of up to 20 percent of the value of the home. If you put down less than this amount, the lender may require you to purchase mortgage insurance to reduce its risk. FHA loans use a mortgage insurance provided through the federal government. For a brief time period, FHA mortgage insurance premiums were tax deductible, but the laws have changed.
Deductibility - 2007 Through 2010
Congress passed a law to make the premiums for mortgage insurance deductible from your taxable income for the year of 2007. This included private mortgage insurance, as well as FHA mortgage insurance premiums. The law was later extended to allow FHA mortgage insurance premiums to be deductible from your taxable income through 2010.
Deductibility - 2011 and On
Congress did not renew the law allowing you to deduct mortgage insurance premiums for 2011. This means that even if you closed your loan during the time that the premiums were deductible, you cannot deduct any premiums paid in 2011 or later.
FHA Mortgage Insurance Premium
The FHA mortgage insurance premium is usually paid in two components. You pay a lump-sum payment when you close the loan, and pay a smaller amount each month with your normal loan payment. The monthly premium payment is calculated based on a percentage of the average outstanding mortgage balance, divided by 12 to arrive at the monthly premium.
Your total mortgage insurance premium that you paid for the year is indicated in box 4 of Form 1098, which your lender will mail to you at the end of the year. Also reported on Form 1098 is your total mortgage interest, which you can also claim as an itemized deduction on Schedule A. To claim a deduction for mortgage insurance during the years allowed, your adjusted gross income can not exceed $100,000 for the year.
To avoid a mortgage insurance premium you can consider a piggyback loan. These are also called 80/20 loans. If you borrow 80 percent of the value of the home or less, mortgage insurance is not usually required. If you cannot put down the required 20 percent payment, you may be able to borrow part of that money on a piggyback loan. The additional money you borrow is a higher risk for the lender, so it may be for a shorter term and at a higher interest rate than the first mortgage. However, that interest is often deductible on your income taxes.