Deducting up-front mortgage insurance after a refinance

[mh0520]

In  March of 2019, we purchased a home and paid upfront mortgage insurance at the time of closing. For my 2019 taxes, I deducted the total up-front payment distributed over 84 months and then multiplied by the number of mortgage payments we made in 2019. In 2020, we refinanced and again paid an upfront mortgage insurance premium.

For the new mortgage, after the refinance, I plan to do the same thing I did for the original mortgage and distribute it over 84 months and deduct the correct amount for the number of payments made this year.

What's not clear to me, is how I should handle the mortgage insurance from the original mortgage? For our 2019 taxes, I deducted for 7 months so if I understand correctly, I still have 77 months left that I can deduct for. Can I continue to deduct for the whole 12 months in 2020 despite the fact that the original mortgage was paid off after refinancing and a new mortgage started or do I miss out on deducting the rest of the premium? Can I only deduct for the 3 payments that I made in 2020 for the original mortgage?

[KathrynG3]

Yes, unfortunately, you will miss out on deducting the rest of the Mortgage Insurance Premiums if you refinanced before the 84th month. My post below has more details or you can check out this section of IRS Publication 936: Claiming Your Deductible Mortgage Insurance Premiums.

Keep in mind if points had been involved with refinancing, the remaining point balance not yet deducted would have been deductible in the year the loan was paid off. In such a scenario, the life of the mortgage is used, not 84 months.

See Deducting Mortgage Interest FAQs and scroll down to What if I refinanced? to learn more. 

@mh0520

[Edited 01/23/2021 | 3:49 PM PST]

[mh0520]

@KathrynG3, thanks for your response! this brings up a few more questions.

So you mention points. Are you using points in a general way? I normally think of points as what would show up in box 6 on the 1098 form. I just want to make sure that I understand what you mean as I'm talking about MIP showing up in box 5.

As for my initial question, maybe if I fill in some more detail it will be easier to explain. The refinance in 2020 was with the same lender as our original mortgage. We held that original mortgage for approximately a year, and when doing our taxes for 2019 we deducted for 7 out of the 84 months that I understand the deduction should be distributed over. Additionally, we paid 3 payments on that mortgage for 2020 before refinancing. Does the way that I calculate the deductible portion change now that my original mortgage has been paid off in the refinance? Do I continue to deduct the MIP 12 months at a time (assuming this deduction is extended beyond 2020) until all 84 months have been exhausted? Do I now instead deduct whatever is left of the MIP on my 2020 taxes since the mortgage is paid of and thus the life of the loan was only 12 months?

I'm also assuming that as far as the new mortgage goes, this should be distributed over the allowed time and deducted a little bit at a time each year as well.

Sorry, this is all a bit confusing and I'm just trying to make sure I optimize the deduction but do so correctly. Thanks!

[KathrynG3]

That does change the answer. Mortgage Insurance Premiums are amortized over 84 months, but only until the loan is paid.

Per IRS Publication 936 Home Mortgage Interest Deduction, page 8, middle paragraph states: No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. There are less stringent rules if the mortgage is with the Department of Veterans Affairs.

Yes, the new mortgage insurance premiums would be amortized in the same manner as the first premiums.

Thank you for clarifying the circumstances!

@mh0520

[mh0520]

@KathrynG3, I looked a little further into this and found publication 936. It includes the following statement:

"No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term."

I take this to mean that for 2020, I can deduct a portion of the MIP for the first three months of 2020 since my refinance closed at the end of March. From that point on, I assume that the mortgage has been "satisfied before its term" and so I cannot deduct any of the remaining MIP.

As for the new mortgage, I assume that at least for tax year 2020, I can deduct the MIP paid on this mortgage according to the rules laid out in publication 936.

Assuming all this is correct, I do have one additional question. My refinance closed  on March 30 and I believe my first payment was in May. Can I deduct starting in March or do I need to wait until May?

[mh0520]

@KathrynG3 , could you please comment on my last reply?

Thanks!

[Opus 17]

You are correct and the expert here is mistaken.  The expert has confused points with mortgage insurance (PMI or MIP).

If you pay points on a mortgage, and then refinance, you can deduct the remaining points in a lump sum if you refinanced with a different lender.  If you refinanced with the same lender, you add remaining points to any new points and amortize the total over the life of the new loan.

However, for PMI or MIP, there is no deduction for the unused part of the up front PMI premium.  You just lose it.  (Essentially, you pay a premium to insure the bank for the first 7 years of the mortgage.  When you pay the full premium up front, you can still only deduct it over 7 years, because you can't deduct an expense before it happens.  If you refinance, that insurance policy is canceled and the bank gets to keep the extra premium; you can't deduct it because the insurance policy no longer exists.)

I will flag this for review.

[KathrynG3]

Yes, what you clarified above is correct.

Regarding the old loan, you should use the ending date, presumably March 30.

Regarding the new loan, you should use the first payment date, which you stated was in May.

@mh0520

[mh0520]

@KathrynG3 

The paid-in-full data that I see in the documents for the original loan is 4/6/2020. Can I also deduct for 4/2020 or should I base it on the closing data for the new loan?

Thanks again for your responses.

[Opus 17]

---

@mh0520 wrote:

@KathrynG3 

The paid-in-full data that I see in the documents for the original loan is 4/6/2020. Can I also deduct for 4/2020 or should I base it on the closing data for the new loan?

Thanks again for your responses.

---

That's unclear.

First, I think I need to make another correction/clarification.  According to publication 936, you can deduct the prepaid insurance beginning the month the insurance was obtained.  This means that if you closed on the new loan on April 6, then you can deduct 9/84ths this year, since the insurance was obtained in April even though your first payment was May or June.  (This is something I had not realized before, and found while researching your other question.)

Special rules for prepaid mortgage insurance.

Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service.

Regarding how much you can deduct from the old mortgage, the question is can you deduct 3/84th (January, February and March payments), or can you deduct 4/84ths (including April).  Publication 936 does not specify or give an example that covers this situation.  The actual law just says "shall be treated as paid in such periods to which so allocated" and publication 936 just says "the stated term".  So I think the proper amount of the PMI to deduct in 2020 for the old loan is 96 days worth, since you held the loan for 96 days before it was paid off. 7 years x 365 days is 2555, so you would deduct 96/2555 of the prepaid premium on the old loan, slightly more than 3 months worth. 

[mh0520]

@Opus 17 

Thanks for the response!

To provide a little more context:

We closed on our refinance on 3/30/2020.

Paid-in-full data listed on documents for old mortgage is 4/6/2020.

If I understand correctly, I can deduct starting in the month of our closing, i.e. when the MIP policy goes into effect. That being said, If I should be calculating the amount based on the number of days as opposed to months then there's not much difference between 3/30 and 4/1 and so it seems easier to calculate based on 4/1. If I can deduct for the entire month of March, then it makes sense to do so but not if it's just a couple of days in March.

For the original loan, I completely understand the 96/2555 amount, assuming the paid-in-full date is the correct one to use and not the closing date on the new mortgage.

For the new mortgage, if I go based on the closing date, I can see a few different scenarios.

1. Starting on 3/30 (closing data): deduct for 3/30 - 12/31 or 277/2555.

2. Starting on 3/1 (beginning of month): Deduct for 3/1 - 12/31 or 306/2555

3. Starting on 4/1 (first of the month of paid-in-full date for old mortgage): Deduct for 4/1 - 12/31 or 275/2555

4. Starting on 4/6 (paid-in-full date for old mortgage): Deduct for 4/6 - 12/31  or 270/2555.

In the end, I don't think it makes a huge different in the amount and I think it makes it easiest to go based on the beginning of the month, either 3/1 or 4/1. I would just like to know what would be the best of those four scenarios to base my deduction on.

Thanks,

Mike

[Opus 17]

I would deduct 9/84th of the new mortgage.  84 months is mentioned in publication 936, and therefore I think in case of audit, relying on months rather than exact number of days is not likely to raise an objection (unlike certain other cases where the instructions require calculating to the day.).  To get technical, the new insurance policy (which is insurance provided to the bank, in case you default) was provided beginning on the closing date, when the bank became obligated, so the insurance start date would be 3/30/2020, and while you could bump up your deduction by 0.04% (1 extra day/2555) I'm not sure it's worth it.  You certainly can't start on 3/1 since there was no insurance in place until 3/30.

I would deduct 3/84ths on the old mortgage for the same reason.  While we can certainly argue for those extra 6 days, we can also argue against them for the fact that, once bank B assumed the role of primary mortgagor on 3/30/2020, bank A had no insurable interest in the home, even though bank A did not record the final payment until 4/6.  For the same reason that you can't deduct the lost 77 months--you can't deduct a future payment for an insurance policy that does not exist--then you probably can't deduct those 6 days.

Either way, this is just nibbling around the margins and doesn't change your deduction in any useful way, maybe you could buy an extra coffee on the difference if you pushed the margins.  For mortgage A, either claim 3/84 or 96/2556, if you want to squeeze every penny (2556 because there's at least one leap year in there).  For mortgage B, either claim 9/84 or 277/2556, if you want to squeeze out one more day.  

The main reason I wanted to speak up was my realization that you can count (in your case) the month of April, even though your first mortgage payment was in May.

[KathrynG3]

No, do not use the new loan information with the old one. @opus is correct.

And you're most welcome!

@mh0520

[mh0520]

@KathrynG3  & @Opus 17 

Thank you both for your comments.

It confirms my plan to use the months 1-3 for the old mortgage and 4-12 for the new loan.

Thanks again!