Are Mortgage Insurance Premiums Deductible?

April 19, 1999 "My tax advisor said that I should deduct my mortgage insurance premiums from my taxable income, but others have warned me that the premiums are not deductible. Who is right?" In some sense, they are both right. If one assumes that IRS must be consistent in establishing deductibility, then mortgage insurance premiums are deductible. The IRS, however, says that consistency be damned, they are not deductible. Hence, if you deduct them and are audited, IRS is sure to challenge you. Consistency in the rules regarding deductibility means that if an expense X is deductible, and if expense Y is functionally identical to X, then Y should also be deductible. Interest payments on home mortgages are deductible, and no distinction is made by IRS between the portion of the interest payment that represents compensation for the time value of money, and the portion that represents compensation for risk. If a low-risk borrower pays 7%, for example, while a high-risk borrower- pays 9%, the entire interest payment of the high-risk borrower is deductible. However, if the lender charges both borrowers 7% but requires that the high-risk borrower purchase mortgage insurance, with the mortgage insurer now collecting the 2% or its equivalent, IRS will not allow the 2% to be deducted. That is inconsistent. The IRS classifies mortgage insurance premiums as payments by borrowers for services provided by the lender, similar to an appraisal fee, and as a general matter such payments are not deductible. The problem with this position is that the lender is not in fact providing any service in connection with mortgage insurance. The mortgage insurance premium is a payment for risk, in exactly the same way that the 2% rate increment charged the high-risk borrower is a payment for risk. Apart from possible differences in price, the borrower doesn't care whether the lender receives the payment and takes the risk, or the mortgage insurance company receives the payment and takes the risk. . "Why isn't title insurance deductible?" Title insurance premiums on a policy that protects the lender only also should be deductible, but aren't. The same is true of expenses billed to the borrower that are incurred by a lender in connection with a loan, such as a credit check or appraisal. IRS says they are not deductible because the borrower receives a service for them, but this is a fiction. The lender requires these services as condition for granting the loan, and they provide little or nothing of value to the borrower beyond the loan itself. Furthermore, if the lender elects to cover these expenses in the interest rate or points, they are fully deductible. Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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