Conforming Mortgage Limits and Deductibility of Mortgage Insurance

Conforming Loan Limits Remains the Same

Every year, usually in December, Freddie Mac (FHLMC) and Fannie Mae (FNMA) establish the new loan limits for which they will purchase loans. The 2007 loan limits, which are the same as during 2006 are as follows:

$417,000 for one-unit properties
$533,850 for two-unit properties
$645,300 for three-unit properties, and
$801,950 for four-unit properties.

The agencies do not purchase loans above these dollar limits, nor do they purchase loans on 5+ unit apartment buildings, commercial properties or unimproved land. The loan limits are based on the October-to-October change in the average house price in the Monthly Interest Rate Survey of the Federal Housing Finance Board. This last year there was a slight decline, but rather than disrupt the creation and sale of mortgages, they elected to keep the limits unchanged.

This is meaningful to borrowers who have loans near the limit points. All things being equal, you can expect a better rate if the loan is within those limits. Once you go above those amounts, the loan falls into the "jumbo" category and the rate is typically higher.

Mortgage Insurance May Now Be Deductible

Mortgage insurance is typically required on a loan that is above 80% of the value of the property, and the premium is calculated on the full loan amount. This is designed to insure the lender against the higher risk of making a loan that approaches the full value of the property.

In recent years, a request above 80% of the value of the home has been split into two loans: a first loan not exceeding 80% of the value, and a second loan to complete the financing request. The 80% first loan has received the best market rates available, and the second loan has been created at a higher interest rate to compensate the lender for the increased risk associated with that loan.

Until recently, mortgage insurance has not been tax-deductible. It has been more favorable to a borrower to pay a higher interest rate on the second loan, and have the interest paid be deductible, rather than pay non-deductible mortgage insurance.

Congress recently passed legislation that allows some mortgage insurance premiums to be tax-deductible for purchase and refinance loans closed on or after January 1, 2007. Mortgage insurance premiums for loans closed prior to 1/1/07 will not be deductible. This law pertains to 2007 only, but it may be extended by Congress.

Borrower Criteria:

There is an income threshold for being able to deduct the mortgage insurance paid in 2007.

If the household Adjusted Gross Income (AGI) is < $100,000, the mortgage insurance paid is fully deductible.
If the AGI is between $100,001 and $101,000, the mortgage insurance is 90% deductible.
If the AGI is between $101,001 and $102,000, the mortgage insurance is 80% deductible.
If the AGI is between $102,001 and $103,000, the mortgage insurance is 70% deductible.
If the AGI is between $103,001 and $104,000, the mortgage insurance is 60% deductible.
If the AGI is between $104,001 and $105,000, the mortgage insurance is 50% deductible.
If the AGI is between $105,001 and $106,000, the mortgage insurance is 40% deductible.
If the AGI is between $106,001 and $107,000, the mortgage insurance is 30% deductible.
If the AGI is between $107,001 and $108,000, the mortgage insurance is 20% deductible.
If the AGI is between $108,001 and $109,000, the mortgage insurance is 10% deductible.
Above $109,000, not deductible.

Property Criteria: Primary residences and second homes that have not been rented during the year are eligible. Investment properties are not eligible for this deduction.