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Dr. Don Taylor, CFA, advice columnist Changed appraisal wipes out equity

Dear Dr. Don,
Last year my husband and I refinanced our home. When the mortgage company did the refinance they did an 80/20 with the 20 being an equity line of credit. Well, the broker told us our house was appraised for over $300,000 but it turned out the mortgage company changed the appraisal for much less. We didn't know about this until after the papers were signed and the mortgage company used all of our equity when they refinanced.

Is there a way, even though we don't have any equity, that we can change the line of credit to a second mortgage or refinance again to combine the two? Or is there anything else we can do?
-- Michele Mortgage-Morass

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Dear Michele,
An 80/20 is also known as a piggyback loan. The first mortgage is for 80 percent loan-to-value so there's no need for the homeowner to pay private mortgage insurance, or PMI, and the balance is financed with either a home equity line of credit, or HELOC, or a home equity loan. An 80/10/10 loan has the homeowner making a 10 percent down payment, or in a refinancing, the homeowner has some equity in the property based on the appraisal.

From your letter it sounds like you expected the financing to be more like an 80/10/10 loan than an 80/20 loan and the mortgage lender changing the appraisal makes it look like you don't have any equity in your home.

The good news is that the downward appraisal doesn't change the terms of your current loans. If you want to refinance, the new appraisal will determine how much equity you have in the home and what financing options make sense, given that appraisal.

Homeowners typically have a pretty good idea what their home is worth. If you are confident that yours is worth more than the current lender's appraisal, then there's no reason to worry about how the earlier appraisal will affect your future financing options.

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "financing a home," "saving & investing" or "money."'s corrections policy-- Posted: Feb. 15, 2007
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