Refinancing can be a good option for homeowners who want to change the type of home mortgage they have, lower their home loan interest rate, adjust the length of their mortgage or get an adjustable rate mortgage with better terms.
According to Freddie Mac as of Jan. 28, 2016, fixed-rate mortgages are still low, with a 30-year FRM at a rate of 3.79 percent and 15-year mortgage rates at 3.07 percent. With the current mortgage rates, refinancing a home is an appealing option for those who want to improve their finances.
If a low home appraisal is barring your efforts to refinance your mortgage loan, it’s important to know you have options. There are several ways you can deal with a low home appraisal, and some solutions for your home might include other home loans, government assistance in the form of an FHA loan, or mortgage insurance. Alternatively, you might try to improve the value of your home by making updates before getting another appraisal to qualify for better refinance rates.
Let’s take a look at how home appraisals affect your chance of refinancing, and what you can do if you’re trying to refinance but your home has been given a low appraisal value.
Why Home Appraisals for Refinancing Matter
The process for applying for a home refinance is similar to the approval process you went through with your first mortgage, involving you and a lender. The lender, usually a bank, will consider factors including your income and assets, credit score, other debts, how much you want to borrow, and the value of the home.
The home value is important because it will affect your home’s loan-to-value (LTV) ratio, which indicates your eligibility for a refinanced housing loan. An LTV ratio is the ratio of a first mortgage debt to the value of a home. If you want to borrow $300,000 to finance a $400,000 home, the LTV ratio would be 75 percent.
An LTV of 80 percent or lower is desirable, with your home equity valued at at least 20 percent. LTV ratios higher than this are viewed as higher risk and might result in costlier home loan rates or even require the borrower to purchase mortgage insurance like private mortgage insurance (PMI), which is insurance a borrower pays to qualify for a mortgage loan.
The value of your home is determined by a home appraisal, a valuation of your property by the estimate of an authorized appraiser. Home appraisal fees vary from county to county but the median cost for the service of a certified, state-licensed real estate appraiser is $300 to $400, according to AppraiserPress. The lender will approve an appraiser, but you must cover the cost of the service.
How to Deal With a Low Home Appraisal
Once you’ve gone through the house appraisal process and your home has been given a low value, there are several options you can take after you’ve reviewed the appraisal.
Dispute the appraisal. You can make an appeal or dispute a low home appraisal if you think yours is inaccurate. Check for basic factual errors. Make sure the comparables, or comps, can actually be fairly compared to your home. The homes yours was compared to should be in the same neighborhood and same school district, and should not be significantly different. According to Trulia, you should examine homes yours was compared to for information including square footage, lot size, condition and age, amenities, and whether they are custom or tract homes.
Pay PMI (insurance). Some mortgage lenders will allow you to pay private mortgage insurance if your LTV is greater than 80 percent to help offset some of the risk you present. A lender-paid PMI is another option that allows up to 97 percent LTV ratio. However, PMI and LPMI are expensive and might not be worth refinancing.
Seek government assistance. There are government mortgage-relief programs in place to help homeowners with low home values to refinance a mortgage, as well. Programs such as FHA loans and the Home Affordable Refinance Program might be good solutions. Mary Anne Daly, a senior mortgage advisor at Sindeo, one of San Francisco’s modern mortgage companies, recommended Home Possible as another mortgage program. This program for homes with up to 97 percent LTV is a good option for a mortgage refinance. For homeowners who don’t earn more than a percentage of the median income for their county, this program offers refinance rates that are lower than conventional rates, with mortgage insurance at a reduced rate.
How to Get a Higher Home Appraisal
Another route to qualifying for a refinance is to try to get a higher home appraisal. There are several ways to increase your house value, such as by making your home more up-to-date or functional. The range of possible home improvements includes items to fit all budgets. According to Realtor.com, small and exterior home improvements offer the best value investments.
Make updates to the interior and exterior. Earning a higher home appraisal doesn’t require an entire remodel of your kitchen. You can improve your home’s value by focusing on an update of key features. This can range from upgrading sinks in the bathrooms to changing out windows, or simply applying a fresh coat of paint to rooms and the outside of your home as necessary.
Improve your curb appeal. Make sure your property looks great from the outside by mowing your lawn, trimming your hedges and otherwise tidying your yard.
Provide your own comps. Give the appraiser all the information they need to fairly compare your home and make an accurate appraisal. Include information — such as amenities, the school district, location on the block — about your home’s advantages over similar houses in the same neighborhood that were sold in the last six months. This is not a time to be humble; take the opportunity to highlight all the things you love about your home and that would allow it to be valued higher than comparable homes.
Hunt down permits. Your home might have been given a low appraisal because the appraiser was unable to find permits for additions or upgrades that were made to your property, and was therefore unable to include them. Dig up any permits that would allow room or bathroom additions to be properly valued.
Compile a list of updates. Provide an itemized list of all the updates and home improvements you’ve made, and their dates and costs. The following table details the cost and potential returns of some common home improvements that can be made. Here’s a look at home updates that can be made to fit any budget:
|Home Improvement Made||Cost||Potential Return*||Value Added to House|
|Decluttering and cleaning, DIY or professionally||$0 to $2,500||3 to 5%||$6,150 to $10,250|
|Painting rooms, DIY or professionally||$100 to $1,000||1 to 3%||$2,050 to $6,150|
Repairing or updating landscaping, paint, siding boards, brick walls, roofing
|$150 to $7,500||2 to 5%||$4,100 to $10,250|
|Minor kitchen updates:|
Repairing or updating faucets, light fixtures or cabinet hardware
|$300 to $5,000||3 to 7%||$6,150 to $14,350|
|Minor bathroom updates:|
Repairing or updating bathroom fixtures, mirrors, flooring or upgrading toilets
|$300 to $1,000||2 to 3%||$4,100 to $6,150|
|*Potential increase in asking price, assuming home value of $205,000. Source: Consumer Reports|
The Bottom Line on Refinancing With a Low Home Appraisal Value
Jason van den Brand, CEO of online mortgage refinancing company Lenda recommended one more method to getting a sufficient appraisal within the six months after your initial appraisal: “Sit tight and wait. And monitor any sales of similar properties in your neighborhood,” he said. If, for example, the house next door is highly comparable to yours and sells for the appraisal value that you needed to get your home refinanced, you can call your lender again and let them know about that comp so that the appraisal company can reassess your home’s value.
The bottom line is that even with a low home appraisal, you can still aim for a refinance. Whether you choose to deal with the low appraisal as is or opt to make changes to earn a higher appraisal, there are a variety of actions you can take.
Casey Bond contributed to the reporting for this article.