mortgage

Do you have enough equity to refinance?

Highlights
  • Try to figure out how much your home is worth before you apply.
  • "Never do business with anyone who charges an application fee."
  • Some lenders may be willing to modify your loan.

If you'd like to refinance your mortgage but don't want to shell out hundreds of dollars to find out whether you have enough equity to qualify, you're not alone. Plenty of other homeowners share your dilemma and good solutions aren't easy to find.

"A lot of people have called, got the application, locked that great rate, and then it's down to the appraisal and the deal falls apart," says Joe Metzler, a mortgage specialist at Mortgages Unlimited in St. Paul, Minn.

This outcome is more likely to occur if you bought your home within the last few years and with a small down payment and if home prices in your area have stagnated or declined since then, says Steve Thorne, a home loan officer with Meridian Residential in Cary, N.C. The problem is then compounded by the disappearance of low- and no-down payment mortgages, Thorne adds.

"The product has left the market, and (home) values have not increased," he says.

A spike in home sales and prices combined with a boom in low- and no-down payment mortgages a few years ago explains why so many new homeowners don't have enough equity to refinance today. Lack of equity, and especially being "upside down" or "underwater," is a significant barrier because lenders are naturally loath to lend more than the value of the collateral.

Yet while many homeowners clearly can or can't refinance, others are uncertain as to whether they have enough equity to do so. Unfortunately, the only way to truly find out whether you'll qualify is to submit an application and pay a parcel of upfront fees that can amount to hundreds of dollars.

First estimate your home's value

One good strategy is to discuss your situation with a loan officer or mortgage broker and try to figure out how much your home is worth before you submit a loan application.

"I recommend that people try to get every bit of information they can to get a good accurate estimate before they write that check [because] if [the lender is] collecting an application fee and you are paying for an appraisal and the deal falls apart, that's a pretty expensive lesson," Metzler says.

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Data to help you estimate your home's value
  • Property tax valuations.
  • Recent sales of comparable properties.
  • News reports about local home prices.
  • Sightings of for sale and foreclosure signs on nearby homes.
  • Estimates from local real estate brokers or appraisers.
  • Home valuation websites.

Experts disagree on the relative reliability of these data sources, so it's a good idea to combine data from multiple sources rather than rely on just one.

Keep in mind that while an 80 percent loan-to-value ratio may seem like a magic number that's necessary to refinance, many homeowners obtain a new loan with a much higher LTV ratio. That's accomplished with mortgage insurance, which is paid for by the borrower but protects the lender if the borrower defaults on the loan. Some mortgages insured by the Federal Housing Administration allow an LTV ratio as high as 96.5 percent. And if you already have mortgage insurance on your existing loan, that may not be as important a consideration for you, Metzler suggests.

Fees pile up before loan is approved

If you decide to go ahead and submit a loan application, be sure to find out how much you'll have to pay in upfront fees regardless of whether your application is approved. Altogether, you may be in for $300 to $800 before you find out whether you have enough equity to refinance.

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