One thing you should do before refinancing
It may seem counterintuitive, but sprucing up your home is important. Here's why.
For anyone selling a home, sprucing up is a no-brainer. Repairs, upgrades, painting and landscaping can raise the sales price. But homeowners who are staying put and refinancing often don't bother with these improvements. If you're not looking for a buyer and have years to get around to these things, why bother?
Because the home's condition will be reflected in the lender's appraisal, which will determine whether you get the new mortgage and how large it can be.
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Appraisals start with an analysis of comparable sales data — the prices of nearby homes that have sold recently. Homes that have merely been refinanced are not included. Because most home sellers do spruce up, the comparable prices likely reflect homes in good to excellent condition.
In the second step, the appraiser makes adjustments for differences between the home and what he or she believes to be the standard among the comparables. So if you have a kitchen from the 1970s, and the recently sold homes were more up to date, your appraised value will suffer.
After all, the point of the appraisal is to make sure the home is valuable enough to serve as collateral on the loan. The homeowner may perceive the "value" as including all those nagging improvement plans as if they'd be done, as they surely would be before a sale. But the lender wants to know what the home would fetch as is, in case it had to be unloaded after a foreclosure.
A homeowner with enough financial troubles to land in foreclosure is unlikely to spend big money on repairs and improvements.
The risk of a low appraisal is especially serious for the homeowner who wants to replace an older mortgage, because the new loan typically must be large enough to pay off the old one. Despite rising home prices in the past couple of years, many homes are still worth less than their owners paid for them seven or eight years ago. In those cases, homeowners need to squeeze every dollar they can out of the appraisal. At a minimum, a rejected application will cost hundreds of dollars on appraisal fees and other upfront charges.
Homeowners looking for a "cash-out refinancing" have more flexibility, because they can choose to borrow less. Typically, they own the home free of a mortgage or have an older mortgage with a balance well below the home's current value. For them, a low appraisal will not prevent the new financing but will limit the cash they can take out of the home.
Whatever your reason for refinancing, the first step is a little research into recent sales prices in the neighborhood using sites such as realtor.com, Trulia.com and Zillow.com. Because prices have been changing rapidly, try to find sales from the past six months or less.
Then take a realistic look at your home's shortcomings and decide which ones to tackle.
Unfortunately, many improvements fail to add as much value as they cost, so it probably would not pay to install a whole new kitchen just to get a higher appraisal.
Tidying up, painting, trimming the shrubs and other low-cost jobs are definitely worth doing. And looking at your home from a buyer's perspective can help you see it from an appraiser's.
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One of the biggest factors when pricing out a mortgage (interest rate and closing costs / points) is the loan-to-value ratio (LTV), which is exactly what this article is talking about. Before you spend you time and money (on the appraisal) going through the loan process, do anything you can to gauge how much your home is worth. The best way to do this is to contact the real estate agent that sold you your home, because he or she should be happy to visit with you and look at some comparable sales in the area to estimate what your home is now worth. The other thing you should do is get an idea of what will happened to your pricing (interest rate and closing costs) at different appraised values (different LTV ratios). Either ask your loan officer to explain this to you in writing, or research this yourself prior to even speaking with a loan officer. Visit places like RateBid or Zillow to gather up PERSONALIZED quotes on rate, payment, and closing costs at different appraised values to see how this impacts your pricing. If your appraisal comes in just a hair low could kill your refinance deal or cause the rate to increase to a point where the refinance doesn't even make sense, then you may want to consider whether you even want to take the gamble at all.