Since refinance mortgages are frequently tied to the value of your particular home, dropping values of homes around you might make it seem impossible to refinance. There are ways that you can mitigate or just get around a loss of value in your area. Between choosing the right loan, understanding the price dynamics of your market, and actively managing your home's value, getting a new mortgage doesn't have to be out of reach.
Area vs. House
If you're considering a refinance, do some research on your area and on why prices are dropping. If the low price is because of foreclosures, you might actually end up in a market with two clusters of sales: foreclosed homes at low prices and traditional owner-occupant sales at market prices. In these instances, the overall average moves down, but the value for stabilized homes stays the same. Even if you do lose value, you might not lose as much value as you fear. Another factor to keep in mind is that if values are dropping because investors are buying houses for low prices, many of those houses will get rehabilitated and resold at higher prices, possibly negating some or all of the lost value.
How Low is Too Low?
Just because you've lost value doesn't mean that you can't refi. For instance, if you want to refinance a $100,000 mortgage on a $200,000 house, that loan should be relatively easy to get, since it's only 50 percent of your home's value. If declining values in your area pull your home's value down 35 percent to $130,000, you'd probably still be able to refinance. Since a $100,000 mortgage on a $130,000 house represents a 76.9 percent loan-to-value ratio, the refinance will still fall inside the 80-percent ceiling that many lenders impose for making a refinance loan without requiring mortgage insurance.
If your decreased value is still stopping you from refinancing, you can directly combat the value issue by increasing your home's worth to make up for some or all of your losses. Sprucing up the interior and exterior, tidying up your landscaping, and fixing any obvious problems may ensure that that the appraiser doesn't reduce your home's value. Listing all of your upgrades -- with prices and before-and-after photos -- can ensure that you get credit for all of your work. If you want to spend a bit of money, kitchen and bathroom upgrades tend to bring more value than others. Sometimes, working with your neighbors to have them take better care of their exterior can also increase your home's appraised value.
When all else fails, you may be able to find a refinance loan under the Making Home Affordable umbrella. As of October 2013, the Making Home Affordable program's Home Affordable Refinance program is slated to be available through the end of 2015. If you owe more than 80 percent on a loan owned by Fannie Mae or Freddie Mac, the program lets you refinance your loan without regard to its equity, and, frequently, without any appraisal. Similar programs are also available for loans backed by the Federal Housing Administration, the Department of Veterans Affairs and the Department of Agriculture. They are frequently referred to as streamline loans.
- RealEstate.com: How Do Prices of Recently Sold Homes in My Area Affect My House Value?
- Bankrate: Beat Three Refinance Hurdles
- CNBC: Eight Ways You Can Improve Your Home Appraisal
- Federal Housing Finance Agency: FHFA Extends HARP to 2015
- The Mortgage Reports: No-Appraisal Mortgages Reach More U.S. Homeowners
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.