Mortgage interest rates hit a 19 month low the week of January 9, prompting many homeowners to begin refinancing. All too many have tried in the recent years yet.hold back because they think their house will not appraise for what they need to make numbers pencil. Following is the real skinny if you’re debating whether to pull the trigger…
Harp 2 Refi program: Making Homes Affordable
The program allows a homeowner whose mortgage loan closed June 1, 2009 or before and whose loan is owned by Fannie Mae or Freddie Mac to refinance their house no matter what their loan to value is with no occupancy restriction. That’s right if you have an investment property 200% financed, no problem. The program allows for anyone no matter what their loan to value is to qualify independent of any valuation restrictions. The refinancing lender may or may not need a full appraisal based upon the property and your credit, debt, income and assets. Fannie Mae or Freddie Mac whichever entity owns your loan make the determination about whether an appraisal is needed, not your lender.
FHA, VA, USDA Streamline
If you have a government loan, not only do you not need an appraisal for these programs, you also don’t need to provide tax returns and W-2s. A streamlined program under any one of these three types allows for you to refinance without even needing an appraisal coupled with lighter financial documentation, so long as you’re going from the same loan program to the same loan program for example FHA to FHA. Additionally, all three of these loan programs offer very high loan to value options. For example you can do an FHA loan up to 97% financing on your home, a VA loan will go up 100% financing on your home as will a USDA loan. These present three additional financing alternatives if you are running the risk of having little equity in your home for refinancing.
The 80% Loan To Value 20% Equity Mark
Another viable opportunity for homeowners who are unsure of their equity…may consider the possibility of lender paid mortgage insurance where the lender actually pays the private mortgage insurance you otherwise would be incurring every month as a result of having less than 20% equity. This means you wouldn’t pay pmi despite not having the 20% equity.
It is a well-known fact in the lending world, 20% equity is the benchmark number to be at in terms of ideal home equity to value. Let’s say you owe $350,000 on your home, and are hoping for a value of $440,000 to complete your refinance. Appraisal comes in at $425,000 putting you just a hair over 80% loan to value. In this situation in order to complete the transaction you have to pay the closing costs the lender would be charging coupled with paying down the principal balance to 80% of the value of your home to normally avoid pmi. If you don’t have the additional cash to refinance to remove the PMI on your current mortgage, lender paid mortgage insurance may work for you.Lender pay mortgage insurance we usually go as high as 90% financing on homes all the way to the maximum conforming county loan limit in the area in which the property is located.
Put Your Money To Work For You
Ok, so you’re not eligible for a Harp 2,you don’t have a government loan currently, and for whatever reason a new government loans still just doesn’t make sense. You’re left with two choices possibly having the lender renegotiate the value with the appraiser in order to induce a higher valuation on your home (usually only supported with additional comparable properties the appraiser did not originally include in their report) or paying down the difference between the appraised value and the new loan amount sought.
Many may not be all too thrilled with the possibility of having to bring in several thousand dollars to close escrow based on a low appraisal report. However, short-term interest rates on other assets are still meagerly low. Your mortgage lender could easily run a scenario showing you your cash on cash return by paying down the principal to generate a larger monthly savings on the refinance.
For example let’s say in addition to the general closing cost of $3200 to refinance, your appraisal came in lower and you have to bring in an additional $10,000 to close escrow otherwise you can’t get the loan because the appraisal did not come in high enough. Investing into your principal the additional $10,000 needed to make the loan whole would free up an additional $400 per month. Beyond the original refinance savings of say $200 per month. In other words, $600 per month is now what the potential savings would be by bringing the additional cash. $600 over 12 months is $7200. The total capital needed to make the transaction work is the original $3200 in closing costs plus a $10,000 principal balance contribution, totaling $13,200. That’s a 54% return on your money that you realize indefinitely. The take away here-before you back out of transaction because the appraisal came in lower -look at the real opportunity in the numbers.
If All Else Fails, Silver Lining Exists
Having an appraisal in hand is a measure of simply how much more in value you’ll need in the future to pull off refinance later on. Follow-up with a qualified professional about the possibility of what your home could be worth in say six months out from the appraisal was completed. This could be your loan officer, a real estate agent or if you happen to know an appraiser, all the better. More than likely down the road, your house very well could be worth what is needed (many markets showing strong gains) to complete the refinance, while at the same time, coupled with the fact if you are on an amortizing loan, you’re balance is continuing to drop each month.
Looking to refinance? Not sure yet? No problem, get a free quote today from Scott!