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There's Another Way to Deduct Mortgage Insurance.

One of the better options for those with less than 20 percent down involves a mortgage insurance premium with no subordinate financing. In fact, the mortgage insurance becomes tax-deductible. It's called a financed mortgage insurance premium, and it has no income limitations.

In this type of policy (which is little known, by the way, but every lender that offers mortgage insurance also has this in its arsenal), the mortgage insurance is rolled into the original loan balance. The policy works only when you have 10 percent down, but it can work out better than an 80-10-10 structure.

On a $300,000 home with 10 percent down, the loan comes to $270,000. You also acquire a mortgage insurance premium that isn't made monthly; instead, the entire premium is rolled into the loan amount.

Using the very same figures as in the previous example, the mortgage insurance premium would be about 2.75 percent of the original loan, which would then be rolled into the original loan amount of $270,000. The new loan amount would be $277,425.

The monthly payment based upon 6.50 percent and 30 years is $1,753, very close to the $1,746 for an 80-10-10. Yet there is no mortgage insurance payment; it's rolled into the loan. Yes, you're adding the amount of the mortgage insurance premium to the principal, and yes, it puts a dent in your original equity.

The neat thing about this mortgage insurance premium is that it's refundable when you refinance later on down the road, although the amount you get back is lower the longer you wait to refinance. In this example, if you refinanced after five years, you would get about $3,000 back from your original premium, and if you refinanced three years after the original loan, you'd get more than half of that premium back—a little over $4,000 in mortgage insurance refund.

The point is not to think that there is an "either/or" choice when it comes to mortgage insurance or subordinate financing. It's just that because your loan officer rarely uses a financed premium (or has even heard of it, for that matter), you probably won't be given that option.

I used this very program to buy a house in Austin, Texas, and it was hands-down the best choice. I had 10 percent that I wanted to put down on a home. I financed my mortgage insurance premium, the payments were lower than any subordinate financing available at the time, and I refinanced a couple of years later and got a mortgage insurance refund.

 
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