Currently, for a homebuyer that buys a home for $250,000 and puts the minimum 3.5% down that is required by FHA financing their monthly mortgage insurance premiums are $110.57.  Their total principal, interest,  property taxes, homeowner’s insurance, and mortgage insurance (PITI) is about $1,737.

With the proposed mortgage insurance the same homebuyer would have monthly mortgage insurance premiums of $311.61 (181% increase).  Their projected PITI payment would be $1,938 (11.6% increase).

The bill has yet to become law but I suspect that it will.  It’s unclear at this point how quickly the new provisions would be put in place.  I’m curious to know how happy the private mortgage insurers are about this.  The increase of mortgage insurance premiums should generate a lot more business for them.

What is mortgage insurance?

Mortgage insurance is a required coverage that homebuyers must provide for the lender when they buy a home and have less than 20% for a down payment.  With FHA mortgages insurance is paid in two forms.  First, the homebuyer finances an upfront mortgage insurance premium equal to 1.75% of the base loan amount (increasing to 2.25% in April 2010).  In addition, they make a monthly mortgage insurance premium payment with their monthly payment.

Is mortgage insurance tax deductible?

Under the current tax code the monthly mortgage insurance premiums are entirely deductible for households with adjusted gross incomes (AGI) of less than $100,000.  AGI’s greater than $100,000 are subject to phaseouts.  The upfront mortgage insurance premiums which typically get financed into the loan (FHA, VA, and USDA) are pro-rated based on the lesser of the term of the loan (i.e. 30 years) or 84 months.

What other information is important to know?

There are some other important details.  I’d encourage you to review the IRS’s publication 936.  For example, in order to qualify for this deduction the mortgage insurance policy must have been established after 2006 and it must have been established on “acquisition indebtedness“.  The deductibility of mortgage insurance premiums is set to expire after 2010.

Mortgage Insurance (also known as “mi” or “pmi‘) is insurance which covers the lender against a portion of their losses should the loan they make result in payment delinquency or foreclosure.

There are various forms of mortgage insurance which home buyers should be aware of. Here is a brief explanation of each:

Borrower-paid mortgage insurance (BPMI)- This is the most common form of mortgage insurance. The insurance premiums for this form are paid for by the borrower on a monthly basis and varies depending on the loan amount, loan-to-value, and credit score of the borrower. With this form of mortgage insurance the borrower can request that the mortgage insurance payment be removed from their monthly payment once they have established a 24-month clean payment record and can demonstrate that they have 20% equity in the property.

Example of monthly BPMI payment for $100,000 loan on 95% financing*: $65

Lender-paid mortgage insurance (LPMI or “No mi”)- With this form of mortgage insurance the borrower accepts a modestly higher interest rate in exchange for not having to make a monthly mortgage insurance payment. Often times these plans create the lowest possible monthly payment and can be most tax efficient. However, as of late, this form of mortgage insurance is getting more and more difficult to qualify for. The other limitation with LPMI is that the increase a borrower accepts to their interest rate can never be removed even when they have achieved 20% equity in their home.

Example of additional monthly interest expense associated with LPMI for $100,000 loan on 95% financing: $33

One-time or “upfront” mortgage insurance- With this form of mortgage insurance the borrower makes a one-time mortgage insurance payment at the outset of taking the loan and then does not have to make any additional mortgage insurance payments for the duration of the loan. This option works best for a home buyer who is seeking to create the lowest possible monthly payment and has plenty of equity for down payment and settlement charges.

Example of upfront mortgage insurance for a $100,000 loan on 95% financing: $3,050

Split mortgage insurance- Split mortgage insurance combines aspects of the BPMI & the one-time mortgage insurance forms. With a split mortgage insurance structure the borrower pays an upfront or “one-time” mortgage insurance payment at closing & accepts a monthly BPMI payment as well. The most common form of this is with the FHA program. With a FHA loan the buyer finances an upfront mortgage insurance premium into the loan amount and makes a monthly mortgage insurance payment. These two amounts are less than if the borrower did the BPMI or one-time mortgage insurance exclusively.

Example of most common FHA split mortgage insurance form on a $100,000 loan on 95% financing: $1,425 upfront + $39.58 per month.

You Tube link to see rate update video: http://www.youtube.com/watch?v=uhh_BCCeazg

After moving higher yesterday morning mortgage rates appear to have reversed course on technical trading patterns and testimony from Ben Bernanke.

Mortgage-backed bond prices touched the 200-day moving average yesterday morning and despite worse than expected inflation data that would ordinarily weigh on bond prices were able to reverse higher (see chart above).

Today, Fed Chairman Ben Bernanke is testifying in front of Congress on the outlook of the economy. Watch today’s you tube video to hear which comment is helping mortgage rates move lower.

Current Outlook: floating