A key tax deduction for recent home buyers expired on Jan. 1, as Congress declined to extend the write-off for various types of mortgage insurance.

The change affects anyone who bought a home or refinanced a mortgage since 2007 with less than a 20 percent down payment or equity in their existing home. Homeowners who took obtained their current mortgage prior to 2007 were not eligible for the deduction.

The change affects borrowers with private mortgage insurance (PMI), common on Fannie Mae and Freddie Mac-backed loans, as well as those with FHA, VA and USDA loans. The government-backed loans have their own insurance charges instead of PMI.

Eliminates deduction for annual and upfront premiums

For PMI, the annual fee is equal to about one-half of one percent of the mortgage amount, or about $1,000 on a $200,000 loan. For a homeowner in the 25 percent tax bracket, that would produce a tax savings of $250.

Annual insurance premiums on FHA mortgages range from 0.25 percent to 1.15 percent of the loan amount, depending on the down payment/equity amount and the length of the loan. There is also a 1 percent upfront insurance premium charged at the time of the loan, which is no longer deductable as of Jan. 1.

The VA does not charge an annual insurance premium but does have an upfront insurance fee of up to 1.65 percent of the loan amount. That was deductable for home loans taken out before Jan. 1 but with the expiration of the law may not be taken on VA mortgages obtained in 2012.

Similarly, the 0.3 percent annual fee on USDA home loans is no longer deductable in 2012, and the 2 percent upfront fee is not deductable for mortgages taken out after the first of the year.

It is possible that Congress might still revive the deduction during its current term, but prospects for that are uncertain. The deduction expired along with 58 other consumer tax deductions that were up for renewal but Congress did not extend, including those for state and local taxes, and energy efficiency improvements and homes.

Published on January 16, 2012