Do you have enough equity to refinance?

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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.

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.

Application fees were uncommon not that long ago but have made a comeback and are much more widespread today, according to Metzler. Nevertheless, he says, borrowers should “never do business with anyone who charges an application fee.” If you’re uncertain about your equity, you might want to shop around and try to avoid this upfront charge.

Possible lender fees

  • An application fee that includes the cost of an appraisal and credit check.
  • An application fee plus additional fees for an appraisal and credit check.
  • No application fee but inflated fees for an appraisal and credit check.
  • A variety of other upfront fees.

Another new twist is that some appraisers now demand payment directly from the borrower at the time of the appraisal just in case the refinance doesn’t close, according to Metzler and Thorne, who both say this practice is on the rise. Thorne believes a pay-at-door appraisal is reasonable since the appraiser deserve to be compensated for his or her services. Others disagree. Greg Gwizdz, national sales manager at Wells Fargo Home Mortgage in Des Moines, Iowa, says this practice “shouldn’t be happening” and could be a “red flag” as to the lender’s reputation and stability.

Homeowners may wonder whether they should purchase their own appraisal before they submit a loan application, so they can avoid the paperwork and any question of an application fee. But experts advise against this strategy because lenders are highly unlikely to accept an appraisal ordered up by the borrower.

“With the new rules, it has to be a lender-ordered appraisal, transaction specific, and typically done with the last 30 days,” Metzler explains.

What to do if appraisal is ‘too low’

If you receive an appraisal that you believe is too low, you can try to contest it, Gwizdz suggests.

Ask these questions:

  • Whether you can submit additional information about comparable recently sold homes to be considered along with your appraisal.
  • Whether the lender has a procedure by which your appraisal can be given a second review and further consideration.

You can offer to pay for a second appraisal, but Thorne says that’s more likely to be a waste of money than to bring in a much different valuation.

Be mindful that appraisals–and especially any perceived pressure being placed on an appraiser–can be a sensitive issue since appraisers are supposed to make independent judgments.

“The days of the loan officer having leverage over the appraiser to maybe squeeze more value in are gone,” Thorne explains. “They just don’t have the wiggle room that they used to have.”

Another good tip from Gwizdz is to call your current lender, explain that you’d like to refinance your mortgage to lower your monthly payments and find out what options may be open to you. Some lenders may be willing to modify your loan to make your payments more affordable, especially if you’ve suffered a financial hardship.

“Call back every other month because a ‘no’ now could turn into a ‘yes’ later,” Gwizdz advises.

If none of these strategies works, you may want to ask how much you can qualify to borrow. If the amount is close to your original request, it might make sense to:

  • Pay your closing costs upfront rather than finance those expenses as part of the loan amount.
  • Make up the difference in cash so you can lock in that lower interest rate and payment.

If you wanted to borrow $200,000, but the lender limited your loan amount to $196,000, could you come up with the extra $4,000 to make the deal work?

If not, you’ll have to wait until home prices recover or you’ve paid off more of your loan balance before you’ll be able to refinance.