In the past few days I’ve been thinking about mortgage insurance and how it affects people. For the most part, borrowers can’t stand the idea of mortgage insurance and want to avoid it like the plague. The thought process is since it doesn’t do anything other than protect the lender, why should I pay it?
From about late 2007-2008, conventional mortgage insurance became too costly because of mortgage insurance companies insuring the sub-prime loans that subsequently went bad. The alternative for borrowers who didn’t have a 20% down payment was an FHA loan. The downside to the FHA loan was that there was an upfront mortgage insurance premium and a monthly mortgage insurance premium. However, it was by far the cheaper option for borrowers looking to purchase a home with a limited down payment. It also helped those looking to refinance to take equity out of their home that may have lost value. Quite frankly, it was the loan option that made the most sense for borrowers.
Fast forward to 2011 and mortgage insurance companies have come back into the picture, making conventional loans with less than 20% down an excellent alternative to an FHA loan. For households with joint incomes in excess of $100,000, a conventional mortgage with a single financed mortgage insurance premium rather than a loan with a monthly mortgage insurance premium is the best option. Mortgage insurance is tax deductible up to 100,000 for joint income households. However, it begins to phase out by 10% for every $1,000 over 10%.
Long explanation short, if you have an FHA loan with one of the lower monthly MI premiums (say .50 or .55) and the household income is greater than $100,000, it is time to take a look refinancing into a conventional loan with a single financed mortgage insurance premium. Right now, mortgage interest is still tax deductible for everyone. The single financed mortgage insurance premium is a one-time mortgage insurance premium that is financed into the loan amount, thereby avoiding a monthly mortgage insurance premium. Since the mortgage insurance premium is apart of the total loan amount it will always be deductible.
With rates as low as they are right now, take a look at your household income and your current mortgage to see if refinancing is the right choice for you. If the household earns more than $100,000 and has an FHA loan, you are paying too much for your mortgage.
Michael Conti
