Refinancing your home loan can be a great way to cut the cost of your mortgage.
Interest rates on mortgages are still near record lows, so you can end up paying considerably less per month and over the life of your loan. You can also adjust your mortgage to better suit your needs, extending its term or chopping years off of it. Refinance appraisals are often part of the process of getting a new loan. Depending on how the market has been, getting your home appraised can benefit you during the refinancing process or act as a roadblock to a better mortgage.
Pro: You can get a better deal
One of the benefits of refinance appraisals is that the person appraising your home can decide that it’s worth more than the original amount. A higher appraisal means your loan to value ratio is lower, giving you more equity in the home. For example, if the home’s value when you purchased it was $150,000 and the appraiser determines than the value is now $200,000, you’ve gained $50,000 in equity. If you refinance a loan with $100,000 principal, your loan to value ratio is 50/50, making it look as though you’ve put 50 percent down.
The more of your home you actually own, the more likely a lender is to give you a better interest rate or better loan terms overall, since you’re considered to be less of a risk than a borrower who has less equity.
Con: You might be turned down
The flip side of having a high appraisal and getting a better deal on your loan is having a low appraisal and being denied the opportunity to refinance. In some cases, the value of people’s homes has fallen enough that they owe more on their current mortgage than the house is worth. A lender is going to be hesitant to refinance a loan that will end up being worth more than the actual home.
Con: You may have to take out PMI
There is some middle ground between an ideal, high appraisal and a home that’s under water. That’s if the appraisal reveals that you’ll have a loan that’s greater than 80 percent of the value of your home after you refinance. If your home was originally worth $150,000, but has fallen in value to $100,000, and the principal on your new loan is $90,000, it will look as though you’ve put 10 percent down. In that case, you might have to pay private mortgage insurance on the new loan, until your loan to value ratio is 80 percent or lower.
If you are concerned about your home’s value and the appraisal process, you might want a loan that doesn’t require an appraisal, such as the FHA Streamline refinance program. It might be a good idea get your home appraised before you start the refinancing process, so that you can pick the option that is best for you.
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