Low Home Appraisal, and How it Affects a Refinance

Did you hear about the house down the road that sold for next to nothing?

You should be concerned about these sales in your area if you have an adjustable rate mortgage, or if you are considering a refinance in the near future. Let me say that again, YOU SHOULD BE CONCERNED about these sales in your area if you are considering a refinance in the near future. The reason you should be concerned may surprise you.

If you have owned your home for at least 12 months and want or need to refinance, then the value of your home will be determined by an appraisal. An appraisal MUST consider RECENT home sales in the IMMEDIATE area. So if a home sells for a low price in your area, guess what happens to your appraisal? You got it, it goes down.

Here is the problem IF you need to refinance your home. As your value (appraisal) decreases, the loan amount you carry becomes a greater percentage of the value. This is commonly referred to as Loan-to-Value (LTV). A high LTV loan is riskier and thus more expensive (higher interest rate) than a low LTV loan. Home prices were continually falling after the housing bubble burst, and this is why I say, if you are considering a refinance on your home, you should have done it yesterday. Fortunately, it appears home prices are starting to inch up again. Remember, this is not some sales pitch, I will explain.

Delaying a refinance when home prices are dropping can AND often do result in one of the following:

A) You carry a higher rate than you need to if you acted sooner (before those low sales hit your appraisal).

B) You previously had a 70% LTV (ex. 100,000 value with a 70,000 loan), but now your value has dropped and your LTV is at 82% (85,000 value with a 70,000 loan). Any time your LTV is greater than 80%, you carry mortgage insurance with your mortgage. There are ways around this, but sometimes it is a must.

C) If you have an adjustable rate mortgage and wait too long. When it is too late, you realize that your payoff plus closing costs exceed your homes value, and you are stuck with a payment that consistently increases. You can do nothing despite your good credit and income because at the end of the day a lender will not loan $120,000 on a $100,000 home. You can read about these people in the statistics in the news every day. Their payments continue to escalate, and they have no other options but to continue to try and make the increasing payments.

It is always best to consult a mortgage planner to discuss your plans and options well in advance of your anticipated refinance. This will ensure you get the best deal.