If home values drop, borrowers could pay more to refinance their mortgages

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It’s already harder to qualify for mortgage refinancing, as lenders raised credit score requirements post-pandemic. If home prices fall, it will get more expensive, too.

Homeowners depend on loan-to-value ratios (LTVs) to get competitive rates and low fees when they’re refinancing their mortgage. A drop in home values could raise LTVs, and that can trigger extra costs.

In the latest Home Price Index report by CoreLogic, home prices are forecast to drop 1.3 percent in 2021; this would be the first time in over nine years home prices have fallen, according to CoreLogic’s HPI forecast. Jump to see which markets are forecast to see a drop in home values.

“The very low inventory of homes for sale, coupled with homebuyers’ spur of record-low mortgage rates, will likely continue to support home price growth during the spring,” said Frank Nothaft, chief economist at CoreLogic, in a statement. “If unemployment remains elevated in early 2021, then we can expect home prices to soften. Our forecast has home prices down in 12 months across 41 states.”

Lower home values can make refinancing more expensive

More than 9 million people are eligible for refinancing as rates for a 30-year fixed-rate mortgage hover around 3.50 percent, according to Bankrate’s national survey of mortgage lenders.

Higher LTVs could mean some borrowers will end up paying more for a mortgage refinance, according to Fannie Mae and Freddie Mac loan-level pricing adjustments (LLPA).

An LLPA is a fee lenders assess to conventional mortgages based on more than a dozen risk factors, including FICO scores and LTVs. As your risk factors increase, so do your fees.

“If your home’s value drops by 2 percent and pushes you down to a different tier, you could end up paying more for your loan,” says Julie Aragon, owner of Julie Aragon Lending in Santa Monica, California. “Think of your basic 30-year fixed mortgage rate as a steak dinner; everything else is a la carte. If you have a low FICO score, you pay for that. You live in a duplex, you pay for that. Your LTV is high, you pay for that — all of those things are going to cost you extra.”

LLPAs are calculated as a percentage of your total loan amount. For example, if your mortgage refinance is $200,000 over 15 years, your FICO score is 700 and your LTV is 70, you would pay $1,000 in LLPAs. If your LTV rises to 72 percent, your LLPA would go up to $2,000.

Borrowers with credit scores above 740 and a DTI of 60 percent or less are generally not charged any LLPAs. See Fannie Mae’s LLPA Matrix for an idea of what you can expect in LLPA costs.

The LLPA is just one of many costs associated with a mortgage. Lender fees vary, so it’s important to shop around. Be sure that you check the APR, which is the total cost of a loan, not just the interest rate.

Where home values are expected to drop

Overvalued markets hit by the pandemic are prime targets for price corrections, according to the CoreLogic report. Places that rely heavily on tourism like Las Vegas (-7 percent), New Orleans (-4 percent) and Orlando (-4 percent), are three such metros at risk for falling home prices.

Top 20 housing markets where home values are forecast to drop
Metro Change in home values over next 12 months
Source: CoreLogic
Panama City, FL -7%
Lakeland-Winter Haven, FL -7%
The Villages, FL -6%
Morgantown, WV -5%
Sherman-Denison, TX -5%
Crestview-Fort Walton Beach-Destin, FL -5%
Naples-Immokalee-Marco Island, FL -4%
Sebastian-Vero Beach, FL -4%
New Orleans-Metairie, LA -4%
Jacksonville, NC -4%
Orlando-Kissimmee-Sanford, FL -4%
Austin-Round Rock, TX -4%
Tampa-St. Petersburg-Clearwater, FL -4%
Port St. Lucie, FL -4%
North Port-Sarasota-Bradenton, FL -4%
Odessa, TX -4%
Pensacola-Ferry Pass-Brent, FL -3%
Jacksonville, FL -3%
McAllen-Edinburg-Mission, TX -3%
Beaumont-Port Arthur, TX -3%

However, if some housing markets slide, it should be short and quick, says Selma Hepp, deputy chief economist at CoreLogic.

“Given that the rates of projected declines are relatively small – the largest expected decline is 7 percent in some Florida markets – and the amount of equity homeowners have accumulated over the past 10 years is large, it should not be harder to refinance than in other metropolitan areas,” Hepp says. “The average borrower had about $177,000 in equity through the end of 2019.”

Interest rates are low. If you can refinance now, do it.

— Casey DanekerReal estate agent at Keller Williams Realty

Unemployment is a greater barrier to refinancing, not LTV, Hepp says. A decrease in home prices by a few percentage points would barely put a dent in the nation’s massive $18.7 trillion equity treasure chest.

However, in places where employment might not rebound as quickly, homeowners who have lost their jobs likely won’t qualify for a refi. This not only locks them out of saving money on monthly mortgage payments, but they won’t be able to tap any equity they have in their home.

Some experts are mixed on whether mortgage rates will fall much lower over the next several months. However, they generally agree that if you find a rate that will allow you to save on your monthly payments, don’t wait for them to potentially drop even more.

“Interest rates are low. If you can refinance now, do it,” says Casey Daneker, real estate agent at Keller Williams Realty in Bryn Mawr, Pennsylvania. “If you don’t know if you qualify, call a mortgage lender.”

Featured image by Rudy Sulgan of Getty Images.

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