Which option would you choose?
Assume home is worth $340k and you are refinancing for a 90% loan.
Would you pay $1439 (plus tax and home insurance) at interest rate of 3.875%. Closing costs would be about $21,000 which includes $4896 for Mortgage Insurance. Principle to pay off is $306,000k (90% of home only).
-OR-
Would you pay $1550(plus tax and home insurance) at interest rate of 4.5%. Closing costs would be about $16,000. Principle payment here is higher since you are factoring the MI into the loan. Principle to pay off is $311,661 with the MI.
Also, you expect to stay in the home for the next 5 years. After that.. who knows.. first kid on the way too 
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finance it in as it is a tax deductible item these days
Mortgage insurance is tax deductible on a limited basis. It’s currently being extended as being tax deductible through 2010, assuming you bought the property in 2007 or later. But, this is only 100% deductible with a combined annual income of $100K. It then phases out as you make more money, until it’s no longer deductible if you make $110K.
You would be able to deduct it as part of the principal if you financed it with the mortgage. But, you would pay more in interest charges on it over the lifetime of the loan, as well as having a higher loan balance to pay off when you sold the property.
I would recommend rolling it in with the principal. You will have a marginally higher payment, but you’ll be able to write some of that off. And, the extra $5K or so in principal will probably be negligible when you go to sell. Plus it will be in inflated dollars.