Homeowners can find plenty of incentives for refinancing their existing mortgage. Done properly, a refinancing loan can lower monthly payments, extend the term for paying off the house, or reduce the total amount they'll end up paying for the home. But in order to participate, borrowers must have sufficient home equity to satisfy underwriters and avert high premiums for private mortgage insurance (PMI). When it comes to securing affordable refinancing, remember that equity talks.
Equity and Refinancing
Simply put, equity measures the financial balance between the home's fair market value and the total amount remaining on the original mortgage. When it comes to equity, borrowers who have retired the most on their mortgages have the best chances of getting refinancing approvals. Sad to say, that's not always the case. The number of homeowners who saw home values plummet below what they still owe on their mortgages is staggering.
According to Zillow's Q4 2015 Negative Equity report, some 6.3 million homeowners had so-called "underwater" mortgages, negating all their equity and virtually disqualifying them from conventional refinancing. Communities experiencing the greatest levels of negative equity were in Las Vegas, Chicago, Atlanta, San Jose and San Francisco.
Lenders consider equity and the loan-to-value (LTV) ratio in determining rates based on risk, often levying PMI for additional protection against default. Generally, the lower the LTV ratio, the better your chances of getting a refinancing loan. Industry trends suggest a minimum of 80 percent LTV to secure a new mortgage and a minimum of 20 percent LTV to avoid paying PMI. There are some FHA-insured mortgage products that will accept up to a 95 percent LTV.
Equity Estimators and Appraisals
A formal appraisal can give an accurate valuation estimate for borrowers and lenders. But it isn't a good idea to spring for a private appraisal just to demonstrate value to a potential lender. Lenders use their own appraisers and send applicants the bill. However, homeowners can determine an approximate property value by using LendingTree's Home Equity Loan Calculator. There are other tools to help determine the equity needed to refinance, too.
LendingTree's Refinance Calculator estimates how long refinancing owners must stay in their homes to break even and cover mortgage costs. The Refinance Payment Calculator determines loan affordability based on home value, zip code, mortgage balance, credit score, interest rate, loan-to-value ratio and cash-out options. You can also get a free credit score at LendingTree to help with refinance estimates.
Underwater? Look into HARP Options
The Home Affordable Refinance Program (HARP) is available to homeowners who are current on their payments but are underwater on their Fannie Mae or Freddie Mac mortgages. The minimum LTV ratio to qualify is 80 percent. But the program ends on September 30, 2017, so there's little time left to take advantage of it. With HARP, home valuation does not affect qualification for fixed-rate mortgages; however, applicants must owe less than 125 percent of the current market value. FYI: HARP loans have lower closing costs than conventional refinancing since the lender does not require appraisals.