Mortgage Insurance FAQ – Questions and Answers
Mortgage Insurance FAQ
Get answers to your questions related to mortgage insurance.
Is mortgage insurance tax deductible?
According to the IRS, all 2014 qualified mortgage insurance amounts paid can be treated as home mortgage interest, meaning it can be deducted. The two limitations are that the insurance must be connected to home acquisition debt and the insurance contract had to have been issued after 2006.
Qualified mortgage insurance is insurance given by the Federal Housing Administration, the Department of Veterans or the Rural Housing Service. Private mortgage insurance also counts so long as it fits the definition put forth in the Homeowners Protection Act of 1998 that was then put into effect in 2006. If the mortgage in question was given by the Department of Veteran Affairs, it is usually known as a funding fee. If given by the Rural Housing Service, it then goes by a guarantee fee. So long as the mortgage insurance contract of either of these fees was issued during 2014, these amounts can be fully deducted.
As with anything tax related, there are always special rules. The special rule with mortgage insurance is that if you paid premiums that can be allocated to periods following the close of the tax year, these premiums then count toward the tax period in which they were paid. You then have to decide between allocating these premiums over the shorter bit of the started term or 84 months, starting with the month the insurance began. If the balance is unamortized because it was paid before the term, no deduction is allowed. This special rule does not apply to mortgage insurance given by the Rural Housing Service or the Department of Veteran Affairs.
Keep in mind that if you are making a certain amount (more than $100,000 or more than $50,000 if you are married but filing separately), the deductible can either be reduced or eliminated. If the gross income is $109,000 or $54,500 for married filing separately, the mortgage insurance premiums cannot be deducted.
Does mortgage insurance go down over time?
When you sign on for mortgage insurance, it technically does go down over time, however the percentage of the loan it is based off of does not. You must purchase mortgage insurance if you cannot make a 20% down payment on the house you are buying or go with a FHA loan. This insurance is generally about 0.20% to 1.5% of the yearly loan balance. The annual amount is then split into 12 payments to be made each month. Therefore, each year you live in the house, the lower the total of the remaining loan amount will be, resulting in a smaller insurance amount to be paid each year. Once you have paid off at least 80% of the property’s total value or 78% for an FHA mortgage, you may have the option to refinance or to cancel your mortgage insurance altogether.
What does mortgage insurance cover?
Mortgage insurance came about as a way to protect the money lenders. Should you be unable to make your monthly payments, the insurance will cover the missed payments. If you have to foreclose, the insurance guarantees the lender will get back a percentage of the property’s value.
Does mortgage insurance cover death?
Mortgage insurance does not cover death and should never be confused with other insurances that are. It exists solely to protect the lender.
Does mortgage insurance cover life insurance?
Mortgage insurance is completely different from life insurance. Mortgage insurance pays the lender should you default on a mortgage payment. Life insurance goes into effect upon death to help pay off any existing mortgages.
Can mortgage insurance be canceled?
Yes. Technically, once you’ve paid off at least 80% of the current market value of the home, there are options for you to cancel private mortgage insurance. If you are a high-risk borrower, however, lenders can require you to hold mortgage insurance until the equity you have paid drops to 50%. This can happen should you fail to make mortgage payments. Lenders might also use a higher percentage if you’ve turned the property into a rental. FHA loans are different in that you are required to pay premiums throughout the entire life of the loan.
If your lender refuses to drop the mortgage insurance, look to refinancing the loan. Be careful with this, however. You do not want to end up with a new mortgage that results in you paying more than if you had stayed with the mortgage insurance in the first place.
How is mortgage insurance calculated?
Start by finding the purchase price of your home. Next, figure out the loan-to-value ratio. This number is a quick way for insurance companies and lenders to determine how much you have paid versus how much you still owe before the house is paid off. To determine this, take the amount you borrowed in the loan and divide it by the property’s value. The higher your calculated LTV, the more insurance you will owe.
For example, you purchase a home costing $300,000 and are able to put down $30,000. This means the loan you take out will total $270,000. $270,000 divided by $300,000 is 0.9, or 90%, meaning your LTV is 90%.
Next, you’ll need to know how long the loan will last. Typically, the shorter the loan is, the smaller the rate of the mortgage insurance. Likewise, expect to pay less for fixed-rate as opposed to adjustable-rate loans. For our example, let’s assume you go with the most common choice, a 30-year fixed-rate loan.
Now it’s time to look at buy downs. During a buy down, the seller actually places funds into an escrow account to lower the buyer’s monthly payment thereby making mortgage qualification for the buyer easier. This, however, means the price of the home increases. This usually only happens for a few months and rarely continues through the entire life of the mortgage. For this example, we’re going to assume there are no buy downs.
Go to your lender’s website and take a look at their rate table. If you don’t yet have a lender, perform a quick internet search to find one. For us, we’ll go with a standard mortgage insurance rate of 0.52%.
Finally, it’s time to plug in the numbers. First, find the annual mortgage insurance amount by multiplying the insurance rate and the loan amount. For our examples, this means 0.0052 times $270,000. The annual rate is $1,404. Now we need the amount you’ll pay per month for the insurance. This is simply $1,404 divided by 12. Per month, it will cost you $117.
If you have other numbers, like interest, taxes, principal and the like, add this number to them to determine your grand total for each month. Otherwise, you have your base number for mortgage insurance cost.
Remember that this is a basic way to calculate insurance. There are always factors that will affect your insurance amount. Your credit score, equity, agreed upon interest rate, location and insurance type will also either serve to raise or lower this number.
Can I choose my own mortgage insurance company?
When it comes to choosing a mortgage insurance company, you typically do not get to choose. Your lender does this for you. Once a loan is agreed upon, they send out a mortgage application to many different companies, waiting to hear back as to which one accepts you.
What are the different types of mortgage insurance?
In the world of mortgage insurance, there are three main choices for future homeowners that go with private mortgage insurance.
Single Premium – This type has you pay the entire premium in one lump sum during either closing or is financed into your mortgage. The benefit is that it eliminates monthly mortgage insurance payments.
Lender-Paid – This version puts the mortgage insurance premiums directly into the entire life of the loan. While it can result in a lower monthly payment, there’s a good chance you’ll end up paying more in interest. Be very careful choosing this one as it cannot be canceled since it is permanently included in the loan.
Borrower-Paid – This is the most common. You pay the cost of the insurance every month until the mortgage insurance is either terminated, canceled at your asking because you have paid 20% of the home’s equity or when you have reached the half-life of your loan (for a 30-year loan, this means cancellation at year 15).
In regards to FHA loans, borrowers are subjected to two types.
Upfront Mortgage Insurance Premium – This premium is added to the loan total and is due upon closing. If you choose to refinance within the first three years, the unused premium is refunded to you.
Annual Mortgage Insurance Premium – Unlike the upfront, this specific premium is due annually divided into 12 installments per year. It is required to have with FHA loans and is included in the loan price.