Mortgage issues: when an appraisal is too low

With mortgages approaching record lows, many Massachusetts homeowners are rushing to refinance their homes in order to pay a lower rate. However, this is often a Catch-22. Mortgage rates are low and home values have been decreasing as well, making it difficult for many homeowners to even refinance their home. This makes appraisals one of the most common mortgage issues.

An appraisal is important to a lender because it shows the value of the home. Many lenders strive for a loan-to-value ratio of less than 80 percent. This means that the home should have at least 20 percent in equity or more in order to be refinanced. This is because the home serves as collateral for the refinance. If there is less than 20 percent equity in the home, the mortgage will be deemed too risky for the lender.

Those who have a loan-to-ratio value that is too high may be frustrated, but all is not lost. There are several things a homeowner can do to handle a low appraisal. These include disputing the appraisal. Homeowners can ask for a second appraisal or wait until the housing market improves. Homeowners cans also opt to pay for private mortgage insurance to help reduce the lender’s risk. However, this option can be pricey and not worth the time, money and effort to refinance.

When making the decision to refinance, homeowners should consider not only the interest rates, but the total costs of the loan. There are also closing costs, refinancing costs, document processing costs and appraiser costs to consider. It is not a good idea, however, to refinance in order to pay off credit card debt. This could lead to the home being foreclosed over credit card debt, which is never advisable.

Source: Go Banking Rates, “Q&A: What Should I Do if My Home Doesn’t Appraise at a High Enough Value to Refinance?,” Casey Bond, April 16, 2013.