Lenders normally require appraisals to determine a property’s value before deciding whether to approve financing, but appraisal results can vary depending on the appraiser assessing the property. Lender restrictions often play a role as well. In the end, if an appraisal comes in low, your refinance loan either won't be approved or it will cost you more in interest and fees.
Paying for an Appraisal
Appraisals cost money, and for a homeowner who is refinancing to lower the monthly mortgage payment, paying for an appraisal could strain an already tight budget. Some appraisers want to be paid at the time of the appraisal in case the refinance isn't approved. Consequently, you could be paying money up-front for a loan that doesn't go through, points out mortgage consultant Joseph Metzler in a Bankrate article. Although most lenders order an appraisal before deciding whether to approve you for a refinance loan, an appraisal isn’t always necessary. You may not need to have your home appraised if you qualify to apply for a streamline refinance loan offered by the Federal Housing Administration or the Department of Veterans Affairs.
Not Having Enough Equity
If you made only a small down payment and haven’t owned your home for long, you may not have much, if any, equity to tap into. In the early years of a loan, when you are paying more interest than principal, you aren’t building a whole lot of equity. In addition, you might not qualify for a refinance loan if the value of homes in the area hasn’t increased or if decreasing home values have put you underwater. Although lenders typically look for 20 percent equity in a home to refinance, you still may qualify for a loan but at a higher interest rate, reports the “Chicago Tribune.”
High Loan-to-Value Ratio
If an appraisal comes in lower than either you or your lender expected, you could see your refinance options dwindle. You likely won’t qualify for a loan if your home appraises for less than the maximum loan-to-value ratio the lender allows. This could be the case if your home is located in an area where the market value of comparable homes has dropped due to a recent high number of short sales and foreclosures.The loan-to-value ratio looks at how much mortgage debt you owe in comparison to how much your home is currently worth. Lenders generally associate a high loan-to-value ratio with a higher risk of loan default.
Paying Private Mortgage Insurance
A loan-to-value ratio that’s more than 80 percent of the appraised value of your home won’t necessarily get your refinance denied, but it’s going to come at a higher cost, notes Bankrate. If you don’t have at least 20 percent equity in your home, the lender is going to add on private mortgage insurance to your mortgage payments each month. Although you pay the mortgage insurance premiums, the lender is the beneficiary in case you don’t make the loan payments. The annual cost of private mortgage insurance varies depending on the loan amount.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.