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I Want To Refinance But My Home Didn’t Appraise For What I Paid. What Should I Do?

Have you been sidelined from today’s low refinance rates because your home appraisal is too low? Being underwater in your mortgage is not a good feeling, especially when you could be paying hundreds less after refinancing. Here are several options for underwater homeowners to help you get right-side up in that underwater mortgage loan.

Your Home Appraisal & Ability To Refinance

What is a mortgage refinance home appraisal? When prospective lenders order an appraisal for your refinancing application they are looking for the a monetary value to your home, considered its fair market value if you were to sell.

The appraisal helps lenders determine if you overpaid for your home based on the value of comparable homes in your area. If you overpaid for your home when you purchased or because the local market took a nose-dive, the risk for lenders refinancing your home skyrockets.

Mortgage lenders are all about managing their risk when lending and your home’s appraisal is one factor used in determining your eligibility for refinance rates.

There are several kinds of home appraisals ranging from electronic to a walk through performed by a licensed home appraiser. Fully electronic appraisals rely on a sales comparison approach. The computer looks at the sales of homes in your area with similar characteristics.

These characteristics include physical aspects like the number of bedrooms, bathrooms, how old your home is and the square footage. The quality of your neighborhood matters as similar homes with different schools may be more desirable than yours. If the lender is relying on an electronic appraisal it’s easy to see how you’re not getting credit for things like finishing your basement or your home’s curbside appeal.

What Happens When My Home Appraises For Less Than I Paid?

When you apply for mortgage refinancing the lender uses your home’s appraised value to determine your loan-to-value ratio. (LTV) This ratio along with your credit score is used when quoting refinance rates.

If you have an unfavorable loan to value ratio, higher than 80%, you might find the refinance rates you’re being quoted are higher than what lenders are advertising. If you’re underwater, meaning your LTV is greater than 100% you’ll find lenders will simply deny your application.

Refinancing Options For Underwater Homeowners

If you have an unfavorable Loan-to-Value ratio there are options including government refinance programs. If your home loan is backed by Fannie Mae or Freddie Mac and they got ahold of it prior to June 1st, 2009 you could be approved for refinancing under the Home Affordable Refinance Program.

If your mortgage is privately held by someone like Wells Fargo your options are limited to cash-in refinancing. This means you’re bringing sufficient cash to the closing table to buy your Loan-to-Value down to 80%. For many underwater homeowners this is simply not feasible due to the amount of cash it would take.

If you fall into this category of underwater homeowner your options are limited until HARP 3.0 arrives. Rumors of changes to the Home Affordable Refinance Program eliminate the Fannie Mae and Freddie Mac requirement essentially allowing anyone with an underwater mortgage to streamline refinance.

HARP 3.0 proposals come and go in Congress but nothing has made its way to the President’s desk. The Home Affordable Refinance Program is set to expire at the end of this year. If Congress fails to act I fully expect the President to extend HARP by executive order. Unfortunately until HARP 3.0 materializes the government is leaving millions of underwater homeowners in the cold.

How To Pay Less For Mortgage Refinancing

The most common mortgage mistake made by underwater homeowners is shopping for an approval. If you’re desperate to refinance and jump at the first approval you get without paying attention to fees you’re sure to overpay.

The Good Faith Estimate makes it easy to compare refinance rates and fees by focusing on page two. Make sure the quotes you’re getting are all for the same mortgage program and ask your loan officer for zero discount point quotes. If you’d like to see how paying discount points affects your payments there is a comparison table on page three.

Requesting zero point quotes from the same mortgage program is the only way to make an apples to apples comparison of refinance rates and fees from different lenders.

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