Financing Mortgage Insurance

For conventional loans, there are two ways to pay for private mortgage insurance:

• by adding a small premium amount to each monthly payment (renewable plan, or annual plan)
• by paying a larger, one-time, or single, premium at settlement.

The single premium plans fall into two categories: refundable premiums and nonrefundable premiums. Refundable premiums cost more up-front, but you get a refund of the unused premium if you pay off the loan early. If you are planning to keep your mortgage for only a few years, the pay-by-month plan is probably the best deal. If you are planning to keep your mortgage for several years, look into a one-time premium. Most lenders will let you add the cost of mortgage insurance to your loan amount so the up-front premium does not increase your closing costs; however, your monthly payment will increase to reflect the larger loan.

Financing the one-time mortgage insurance premium has one additional benefit. Mortgage insurance premiums are not a valid income-tax deduction, but if you finance the one-time premium, the interest that you pay on the slightly larger loan amount is deductible. The total monthly payment is somewhat less when premiums are financed rather than paid monthly. The disadvantage is that financed mortgage insurance cannot be canceled unless you pay off the mortgage.

With the FHA MIP and the VA funding fee, you do not have the same flexibility that you do with conventional loans. As with conventional mortgage insurance, you may choose to pay the VA funding fee or up-front portion of MIP in cash or finance it. Note that with FHA- insured loans you still must pay monthly MIP in addition to the up-front premium.