Refinancing your home can be a difficult task under any conditions, but with a low appraisal value, it is especially challenging. The recent housing crisis left many homeowners in this position – the overall drop in home values produced loan-to-value (LTV) ratios that were unacceptably high to banks, putting refinancing out of reach.
Even without a housing crisis, appraisals can come in at surprisingly low values that are below your expectations. Appraisers are human, and they can make mistakes or use incomplete information.
If you have a low appraisal value that makes refinancing difficult, what can you do about it? You do have a few options to consider.
- Challenge the Appraisal – If you have reason to believe the appraisal is in error, you can challenge it. However, you need to have a valid reason – blindly questioning the appraiser's results or competence is not going to get you anywhere.
Read the appraisal carefully. If there is an error by the appraiser, it is most likely in using poor comps (houses that are used for value comparisons). You probably know just as much as the appraiser about the value of homes in your area. Use this knowledge for your benefit.
Were any comps undervalued because of a foreclosure or a short sale? Is your home unique enough that comps were pulled from different neighborhoods with different baseline property values? Did a comparable home sell directly without being listed? Are the comparable sales prices out of date?
If you have made any additions or renovations to your home, make sure those were included in the appraisal.
You can also consider getting a second appraisal on your own, but you need to be relatively sure the value will change. Again, it is important to have a solid reason for increasing the value.
- Check Government Programs – There are multiple government programs available to help with refinancing, especially for lower-income homeowners. The best-known are the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP). HARP is for those who are making payments but are struggling to keep up; HAMP is for those who have missed payments and are nearing foreclosure.
There are several other FHA-, VA-, and military-based programs that can assist with refinancing depending on your status and qualifications. Check www.makinghomeaffordable.gov for more details on all of your options.
- Consider Private Mortgage Insurance (PMI) – PMI is generally required on home purchases where the down payment is less than 20%. Since the risk of default is higher with less initial equity from the homeowner, PMI compensates the lender for the higher risk involved.
You can offer to pay PMI if you can absorb those extra costs and still come out ahead on your refinancing. Typical costs are between 0.5%-1.0% annually on the total loan amount. This could easily amount to well over $100 per month for the average home and a homeowner with relatively low equity in the home.
You may consider asking for PMI terms that will lapse or decrease over a certain number of years, once the lender is assured that you are capable of paying back the loan.
There is a fourth, less pleasant option – wait until your property regains enough value for you to refinance. It would be helpful if this occurs before interest rates begin to rise again, but if not, you will just have to make the best of a bad situation. Keep a constant watch on overall housing values, interest rates, and special refinancing programs for the best refinancing opportunity for your position.