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Can You Refinance a Home With Low Equity?

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Are you thinking of refinancing your home mortgage? Like many Americans, you may be considering a refinance in order to lower your interest rate, change the length of your mortgage term, switch from an ARM to a fixed mortgage or pull cash from the equity in your home.

Your home’s current equity is essentially the amount of money you would pocket after selling your home now. And you may run into trouble if you’re looking to refinance a home with low equity, no equity or even negative equity, which happens when you’re underwater on your loan.

With insufficient equity in your home, you may be limiting your options in terms of the loan amount and interest rate you’ll be offered during refinancing. At a more basic level, your equity actually determines whether you’ll be able to refinance or not.

So what can you do when you want to refinance a home with low equity?

How to calculate your home’s actual value

In order to ascertain where you stand on your equity, you first need to know the value of your home. The most accurate way to learn your home’s current market value is to get an appraisal. In fact, a professional appraisal is an essential component of refinancing, but you can also pay a few hundred dollars out of pocket before you begin the process to see where you stand.

Of course, before you shell out for an appraisal, it’s worth it to get a rough (but free) estimate of your home value. You’ll probably see a lot of variability in estimates, so use a combination of these resources to narrow in on a price point for your house:

  • Recent sale prices of comparable homes near you.
  • Data or news sources that detail the state of property values in your area.
  • The property tax valuation of your home.
  • The property tax valuations for comparable homes. Roszell Gadson, a spokesperson for State Farm Bank, notes that these amounts are part of public record. You can usually locate them for free in your state’s online database.
  • Websites that offer free home estimates.
  • A conversation with an experienced, local realtor. “If the homeowner worked with a real estate agent to purchase the home, reach back out to them,” recommended Bill Banfield, executive vice president of capital markets at Quicken Loans. “He or she has an understanding of your market and access to property and market valuation tools that can help.”

How to calculate your home equity

The amount of equity you have in your home is a critical factor in processing your refinancing application. And, once you know the current market value of your home, it’s easy to compute both your home equity and your home-equity ratio.

To calculate the dollar value of your home equity, subtract the current balance of your primary mortgage from the current market value of your home.

Let’s say your home is worth $250,000 and you have $150,000 left on the mortgage. Your home equity is $250,000 – $150,000, or $100,000.

Your home-equity ratio is simply the number that represents what percentage of your home you actually own. To calculate the ratio, divide the home equity value you just figured out by your home’s current value. For example, if you have $100,000 equity in your $250,000 home, your home equity ratio is $100,000 / $250,000 = 40%.

Want to compute your loan-to-value (LTV) ratio? This number is important as well. Your lender will calculate your LTV when reviewing your refinancing application. To get it, subtract your home-equity ratio from 100%. In the example above, your LTV ratio is 100% – 40% = 60%.

Keep in mind that a lender will sometimes look at your combined loan-to-value (CLTV) ratio in addition to your LTV ratio. While an LTV ratio considers just your home’s value and the balance on your first mortgage, a CLTV also includes additional loans against your home – second mortgages, home equity loans (HELs) and home equity lines of credit (HELOCs).

How much equity do you need to refinance?

Whom you choose as your lender matters when you are looking to refinance a low-equity home.

Quicken Loans, for instance, requires an LTV ratio of at least 97% to refinance a conventional mortgage. Meanwhile, Chase Home Lending uses a 90% LTV or 80% CLTV as a rule of thumb, but the company offers certain mortgage products to customers who do not meet those criteria.

If you don’t have an LTV of at least 80%, you may get approved for refinancing but be saddled with a higher interest rate or required to pay for private mortgage insurance (PMI). With PMI in place, you might gain access to refinancing options that may not have been available to you otherwise.

Having trouble meeting your lender’s target LTV for refinancing? If it’s within your means, says Banfield, you can pay down the balance of your current mortgage in order to build equity in your home, decrease your LTV and meet refinancing criteria. You should also consider limiting or eliminating the cash you’re pulling out your home when refinancing, says Jeff Rickens, senior lending manager at Chase Home Lending. He recommends working with your lender to assess your particular circumstances and evaluate the options available to you.

Prepare for fees before refinancing

When you signed on for a mortgage, you probably had to shell out several thousand dollars toward various fees. And refinancing is no different in that regard.

“Refinances have comparable costs to purchase mortgages,” said Banfield. “Depending on the loan program, rate selected and property location, fees can range up to 1% to 2%. Sometimes a ‘no-fee’ option is available when a slightly higher rate is chosen.”

So while fees vary, you should likely prepare to pay for the following:

  • Mortgage application fee: Your lender reviews your refinancing application and pays for a credit check. You’ll have to cover this fee even if your application is denied. ($75 – $300)
  • Loan origination fee: Your lender charges you for reviewing and processing your loan application. (0% – 1.5% of the total loan principal)
  • Appraisal fee: Your lender orders an appraisal of your home in order to understand its current market value and compute your LTV. ($300 – $800)
  • Inspection fee: Your lender may hire inspectors to examine your home’s structural integrity, roofing, plumbing, electrical and more. ($175 – $350)
  • Survey fee: Your lender hires a surveyor to pinpoint your property lines and the locations of structures on your property. ($150 – $400)
  • Title search & title insurance: Your lender runs a records search to confirm your ownership of your property and to track down existing loans. The insurance coverage protects against misinformation from the title search. ($700 – $900)
  • Mortgage points: (0% to 3% of the principal) Points, which are 1% of the loan principal each, may be required for the lender and mortgage terms you choose. Additionally, you may opt to pay points upfront in exchange for a lower interest rate.
  • Attorney or closing fees: Your lender pays an attorney to close on your refinance and passes that surcharge along to you. ($500 – $1000 but can be higher depending on location)
  • Recording fee: Your lender pays a fee, as required by your municipality, in order to include your refinancing in the public database. ($25 – $250)
  • Private mortgage insurance: You may be required to cover PMI if your loan exceeds 80% of your property’s appraised value. (0.5% – 1.5% of the total loan principal)
  • Homeowner’s insurance premium: You’ll be required to have insurance coverage on your home in effect at the time of your closing. ($300 – $1000)

Keep in mind that your current mortgage and your new mortgage may present additional fees. For instance, you may be required to pay a prepayment penalty for closing out your existing mortgage. And government-backed loans like FHA or VA loans can present with additional surcharges.

What to do if the appraisal comes in too low

What do you do if your appraisal comes in lower than you believe to be the true value? If the appraisal was authorized by a prospective lender as part of the refinancing process, you may be able to contest the report. Ask your mortgage representative the following questions when your home is undervalued:

  • What’s your appeals process? Get the details of your lender’s policies for overturning the appraisal findings.
  • Which homes were used as comparable listings in my home’s appraisal? “If homeowners think there are more recent home sales in their area, they can work with a local realtor to identify them a service many provide for free,” Banfield pointed out. “If the realtor finds sales more recent than those reflected in the appraisal, the homeowner can ask why more recent sales weren’t used for the appraisal.”
  • What factors made my appraised value lower than I would have expected? Is the housing market in a slump, or were you dinged for problems with home upkeep?
  • How can I fix the factors that decreased my home’s value? If your report cites bad pipes, faulty wiring or roofing problems, consider repairing those issues to boost your home’s market price.
  • Can I get a second appraisal on my home? “Homeowners who receive an appraisal that is lower than expected can request a reassessment,” shared Rickens. “The customer will need to provide three additional comparable properties for us to consider in determining an accurate value.”
  • Is there a downside to requesting a second appraisal? In addition to paying another appraisal fee out of pocket, you might run into trouble. “There’s risk that the new value comes back even lower than the first,” shared Gadson, “and the lending institution would need to decide which value to use.”

You may also get some traction by talking with your current lender about refinancing, as you already have an existing relationship in place. If you can’t get anywhere with your lender or other lenders, see whether you can refinance with terms that are close enough to those that you were hoping to get at the valuation you had hoped. You may need to pay some money out of pocket to make up the shortfall in valuation, but that could mean the difference between not getting a loan and successfully refinancing.

Refinancing options for low equity

If traditional lenders turn you down, it’s not over yet. Certain government-sponsored loans may be available to you when you don’t own much equity in your home.

Home Affordable Refinance Program (HARP)

Established during the housing crisis of 2009, HARP was structured to assist homeowners who suddenly found themselves underwater on their mortgages. “The rules for the HARP program have changed several times in the last few years,” noted Banfield, “so if someone was turned down in the past, we suggest checking again to see if they may be eligible now.”

To be eligible for HARP, you need to

  • Be current on your mortgage,
  • Be looking to refinance your primary residence,
  • Have a loan that predates June of 2009,
  • Have an LTV that exceeds 80%, and
  • Have a loan that’s owned by Freddie Mac or Fannie Mae.

FHA streamline refinance

If your credit or LTV ratio disqualifies you from refinancing with a traditional lender, the Federal Housing Administration may offer you an option in the form of an FHA loan. These loans, offered through lenders that are backed by the assurances of the federal government, still have desirable interest rates and may get you refinanced with up to a 95% LTV ratio.

The FHA Streamline Refinance program provides refinancing for homeowners who already have an FHA mortgage. The process loosens up on a number of typical refinancing qualifications and eliminates much of the paperwork. To qualify, you’ll need to be current on your existing FHA mortgage, minimize the amount of cash you pull out during the refinance and choose loan terms that are better financially for you than your existing loan’s terms.

VA Interest Rate Reduction Refinance Loan

Administered by the U.S. Department of Veterans Affairs, an Interest Rate Reduction Refinance Loan (IRRRL) may be sought by veterans who have an existing VA loan on a home that they’ve occupied at some point.

It prohibits you from pulling cash out of a refinance but rolls the costs of the process into the loan. As a result, you pay nothing out of pocket upfront. In addition, the VA does not require an appraisal or a credit check.

Are you thinking about refinancing? Use our Refinance Calculator to see if it makes sense for you to refinance your current home loan. And, if it does, follow these steps to avoid surprises and maximize your financial benefit.


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