Deductibility of premiums for mortgage insurance is a new wrinkle of the federal tax code, but the provision long sought by Milwaukee's MGIC Investment Corp. is catching on very slowly.

The main reasons for its lethargic reception include lack of knowledge by brokers; the belief of many brokers that there are better alternatives to the insurance for people with small down payments; and the limitations of the law.

Still, the law could help buyers.

"For the first time ever, there is the possibility that (mortgage insurance) is a great idea," said Brad Stroh, co-chief executive officer and founder of Bills.com, a personal finance Internet portal based in San Mateo, Calif. "You could end up saving a great deal of money."

The provision, passed at the end of December, allows people with household incomes of $100,000 or less to deduct mortgage insurance premiums on their federal income taxes in 2007.

Mortgage insurance is often required for deals in which a buyer puts down less than 20% toward the price of a house. It covers the risk to the lender should the borrower be unable to keep up payments, and usually must be maintained until the borrower has at least 20% equity in the property. Premiums vary, with credit scores, the amount of down payment and the type of property among the variables.

In recent years, many buyers with less than 20% have avoided the cost of insurance by taking out a first mortgage for 80% of the value and a second mortgage to raise money toward the down payment. As the interest paid on that second loan is deductible, and as part of its monthly payment goes into the equity of the home, many brokers have recommended such loans as better than buying mortgage insurance. MGIC pushed to have the insurance premiums become deductible as a way of fighting that strategy.

Stephen LaDue, president of Affiliated Mortgage Corp., Wauwatosa, long has recommended that clients avoid buying mortgage insurance. "Why are you paying for insurance that doesn't benefit you?" he asked. Making the premiums deductible could make insurance more attractive, he said, but only "a little bit."

Another problem with the provision is the income limitation. A husband and wife who each earns $52,000 would not qualify, he said, and that includes a lot of buyers.

Certainly that is the case in large parts of suburban Milwaukee.

"Most of our consumers are above that (income) threshold," said David Scott, manager of the Coldwell Banker office in Cedarburg.

Not a selling point

In other, less affluent neighborhoods, lack of knowledge about the deductibility, or the fact that most people do not itemize deductions, also has slowed acceptance.

The deductibility of premiums is not a selling point, said Nina Halcomb, owner of Lyon Realty, which has offices on the south side of Milwaukee and in Waukesha. A bigger help would be cutting down on closing costs, she said.

Beechie Brooks, president of United Realty Group on the north side of Milwaukee, said he had not even noticed the change in the law.

MGIC is working to spread the word, said Sal Miosi, vice president of marketing. The company has produced brochures and information sheets on the new law, and its representatives are talking about it as they call on clients.

MGIC expects the percentage of mortgages with insurance to increase this year, but it will be difficult to tell how much is because of the new law, Miosi said. Higher interest rates and more selective lenders also will contribute.

The limited term of the law also works against it. Congress will have to extend it for the premiums to remain deductible after 2007.

That probably will happen, said Stroh.

It is very hard to get new provisions in the tax code, as MGIC found after battling to make premiums deductible, he noted. But it also "is very tough to remove them," he said.

If the law is extended and people can deduct mortgage insurance premiums for five years and then cancel the insurance when they have paid down enough of their mortgage to have 20% equity in their home, then the attractiveness of mortgage insurance rises, he said. If the home gains value, too, then the 20% equity will be reached even sooner, and insurance can be canceled in fewer years. That can make paying for it cheaper than paying a high interest rate for a second mortgage.

The best thing to do is to take a sharp pencil to the matter, and figure costs for several years with and without insurance, said Michael Holloway, a buyer's broker and owner of Homebuyer Associates, Milwaukee. "The smart people will simply do the math, and the math will answer the question," he said.