• By David Slade dslade@postandcourier.com
• Feb 5, 2017

With houses selling for as much as they do today, it can be very difficult for buyers to come up with the 20 percent down payment needed to avoid mortgage insurance.

Consider that it would take more than $80,000 to make a 20 percent deposit on a mid-priced house in Mount Pleasant. Smaller down payments are common, but result in loans that require costly mortgage insurance.

Mortgage insurance can be expensive, and it’s designed to protect the lender — not the home buyer — in case of a loan default.

With some loans, specifically FHA mortgages issued in the last several years, mortgage insurance is required for the life of the loan. With most loans, mortgage insurance is dropped once the loan balance hits 78 percent of the value of the property.

Here’s the catch: With an existing loan, the calculation for dropping mortgage insurance depends on what the property was worth when it was purchased, not what it’s really worth today. But if that loan were refinanced using an up-to-date appraisal that showed the amount to be borrowed was less than 80 percent of the current property value, then the new loan should not require mortgage insurance.

Many years ago, my wife and I bought our first house. We made a modest down payment and the loan required mortgage insurance. But about three years later, real estate values had increased, and we were able to refinance and drop mortgage insurance. That was a significant savings.

Of course, there are costs involved with refinancing a mortgage, and interest rates have ticked up from the record lows seen last summer. The question is, could you potentially refinance and eliminate the cost of mortgage insurance for years to come, and if so, would that be a wise financial decision?

A person with a 700 credit score who borrowed $200,000 to buy a house, with a 5 percent down payment, could be paying about $150 every month for mortgage insurance. That’s $1,800 a year.

Some points to consider:

• How many more years will you be required to pay mortgage insurance with your existing loan, and what would that add up to? Generally, the cost of mortgage insurance depends on the size of a down payment, the credit score of the borrower and other factors.
• How certain are you that you would have the required 20 percent equity if you refinanced. It’s easy to get an idea of what a property is worth, but a loan would depend on a professional appraisal.
• What’s the interest rate on your existing loan, and what  rate could you get if you refinance? If you could get a lower interest rate and drop mortgage insurance, that’s a slam-dunk.
• Remember that refinancing will give you options to take on a shorter-term loan with higher monthly payments, or a longer-term loan with lower payments. If you have a 30-year loan, and after making payments for several years you refinance into a new 30-year loan, you’ve added several years to the life of your mortgage debt.
• Has your credit score changed significantly since you secured the original mortgage? The answer will help determine the refinancing options available to you.

In the greater Charleston area, I’d estimate that most people bought a home from 2009 through 2013 have gained substantial home equity, just from the overall increase in property values.

Real estate prices soared through about 2007, then fell hard during the recession that officially arrived in 2008, stayed depressed for several years, then rebounded. Properties I know of that were selling for $250,000 in early 2013 on the Charleston peninsula, or Mount Pleasant, are selling for about double that today. Houses in more modest neighborhoods may not have doubled in value, but they’ve increased substantially.

What this means, if you bought a house after prices fell but before the big rebound, is that you have a lot more home equity — the difference between what the property is worth and the mortgage balance. And that means eliminating the cost of mortgage insurance, by refinancing, could be an attractive option to consider.