If you paid a really big upfront mortgage insurance premium at the closing table, you may be able to recoup some of that cost by deducting your payments on your federal income tax return.
There are a couple of caveats, however.
- You must itemize your taxes to claim it.
- You can only take the upfront mortgage insurance premium deduction through tax year 2020. More on that later.
How Do You Know If You Paid Upfront Mortgage Insurance Premium?
An upfront mortgage insurance payment is different than monthly payments for mortgage insurance. Check the settlement statement you got at closing, i.e. the sheet showing what you paid and what the home seller paid when you closed on your home purchase. If you have:
- A Veterans Administration (VA) or USDA Rural Housing-guaranteed loan, the upfront fee will be labeled “funding fee” or “guarantee fee.”
- An FHA loan, it’ll be listed as “upfront fee.”
- Private mortgage insurance, an upfront fee is a “single premium,” and it’s likely labeled MIP (mortgage insurance premium).
- No up front fee, and you do have mortgage insurance, you likely got a monthly payment policy.
The purpose of any type of mortgage insurance is the same: to protect the lender in case you default on the loan.
The upside is that it’s a good deal for aspiring homeowners. Many people, especially first-time buyers, can’t come up with big down payments. Mortgage insurance encourages lenders to give home loans to those who have the means to pay a mortgage but lack the hefty down payment.
Not Everyone Qualifies for the Deduction
If your adjusted gross income (AGI) is no more than $100,000 ($50,000 for married filing separately) and you took out the loan in 2007 or later, then you can take the mortgage insurance deduction as part of your mortgage interest deduction on Schedule A. The mortgage must be for your primary residence or a second home that’s not a rental property.
If your AGI is higher than $109,000 for couples ($54,500 for married filing separately), sorry, you’re out of luck. No deduction for you.
If your income falls between $100,000 and $109,000, your deduction is phased out. Use the worksheet that comes with Schedule A to see how much you can deduct.
Got a VA or Rural Housing Loan? Lucky You!
If your loan was made through the VA or the USDA’s Rural Housing Loan Program, your upfront payment is completely deductible in the year you pay it.
Put the amount listed on your HUD-1 for guarantee or funding fee right onto your Schedule A.
Deducting Your FHA Upfront and Single Premium Payments
If you have an FHA loan or you bought a single-premium private mortgage insurance policy, you have to do a little math to figure out how much you can deduct.
Start with the amount you paid (or financed into your loan), and divide by whichever time frame is shorter: 84 months (that’s seven years) or the total number of months of your loan’s life. (We could go into great detail why this formula was chosen, but we figure you probably don’t care. You just want to know how to do it, right?)
Since pretty much everyone has a mortgage term longer than seven years, you’ll probably use the 84 months.
Here’s an example: Let’s say you bought a house last January and paid $8,400 upfront for mortgage insurance.
$8,400 ÷ 84 = $100
Multiply $100 by the number of monthly mortgage payments you made during the year. (For example, 12 if you started making monthly payments in January, or six if you started them in June.)
$100 X 12 = $1,200 or $100 x 6 = $600
Assuming 12 payments, your deduction is $1,200.
Enter that figure on line 13 of Schedule A.
A big caveat: Remember the deduction is only good through tax year 2020. So if you paid $2,000 in upfront PMI premiums on Jan. 1, 2019, you might be able to deduct $286 on your 2019 taxes ($2,000 / 84 x 12). You could deduct another $286 for tax year 2020. But deducting the rest depends on whether Congress extends the provision beyond 2020. And deductions are only a thing if you itemize.
Note: Don’t confuse upfront mortgage insurance premiums with pre-paying your monthly mortgage insurance premiums. If you paid your January 2020 premium in December 2019, that’s a pre-payment. Paying upfront means you paid a whopping premium at closing.