Now is a great time to refinance because as I write these words in November 2010 mortgage rates are at historically low rates.
Loan-to-Value at a Glance
It may be a challenge for you to refinance when the value of your home is less than the balance of your existing loan. In mortgage banking jargon, what you described is a loan-to-value (LTV) ratio greater than 100%
What is LTV? LTV refers to the percentage that results when the amount you owe on the loan is divided by the home’s value. Thus, using simple round numbers, if your loan is for $80,000 on a $100,000 home, your loan to value would be 80,000 divided by 100,000 or 80%. That also means that you have 20% equity in your home, or $20,000 of equity value in this scenario.
You mentioned assessed value. Assessed value is the value that a public official has placed on a property for the purposes of determining taxes. The assessed value is typically lower than the fair market value. You mentioned that when you bought the house in 2007, the purchase price was $160,000, and the assessed value was $129,000 at that time. In my experience, it is customary for the assessed value to be 10% to 25% less than the fair market value. Therefore, it is not surprising your 2007 assessed value was so low.
Assessed value is meaningless for mortgage refinance purposes. Appraised value is what mortgage lenders look for. Appraised value is an estimation of the current market value of a property. An appraisal is a document written by a professional property value estimator that gives an estimate of a property’s fair market value based on the sales of comparable homes in the area and the features of a property. An appraisal is generally required by a lender before loan approval to ensure that the mortgage loan amount is not more than the value of the property.
You mentioned that your real estate agent guessed that he or she could sell the property for the assessed value. Because of the bubble bursting in the real estate market and housing prices falling from 15% to 50%, it may be a coincidence that the fair market value on your property today also happens to be the 2007 assessed value. However, that is a guess, and the wise course of action is to determine the appraised value of your property.
For the sake of argument, let us say that an appraiser inspects your home and gives it an appraisal value of $129,000. Your loan balance is $153,000. Your loan-to-value (LTV) is 1.18 or 118%.
Another way to think about loan-to-value is the opposite of equity. Equity is determined by subtracting the amount owed from the value of the home and would also register as a percentage when the difference is divided by the value of the home. You will find that the percentage LTV and the percentage of equity will always add up to 100%.
Cumulative Loan to Value or CLTV (sometimes referred to as "combined loan to value") refers the total amount owed. It comes into play most often when two loans must be taken into consideration. For instance, if you are securing a first mortgage for 80% of the home's value and a second mortgage for 15% of the home’s value, the LTV of the first is 80% and the LTV for the second is 15%, but the CLTV is 95% as the sum of both loans is equal to 95% of the home’s value. In this scenario, your equity is 5% of the home’s value.
When you apply for a loan, LTV or CLTV will be taken into account and will be used to determine several things depending on the mortgage program you’re using. For most programs, you will need a certain minimum credit score to qualify for higher loan-to-value.
A rule of thumb is to keep the LTV of a home mortgage below 80%. This is a challenge in 2010 for homeowners who bought in 2003-2008 just before home values took a precipitous and deep drop. What can a person who owns a home with a 100%+ LTV and needs to refinance do?
Home Affordable Refinance Program (HARP) allows home owners to refinance their existing mortgages to current low interest rates. It is designed for homeowners who are current on their mortgage payments but are unable to refinance to a lower interest rate because their home values have decreased.
Homeowners may be eligible if their first mortgage does not exceed 125% of the current market value of the home. For example, if a property is worth $200,000 but the balance of the loan $250,000 or less on your first mortgage, you may be eligible. See the HARP Web site for a brief questionnaire to see if you qualify.
As we calculated above, your LTV is 118% (assuming your guess regarding the appraised value is correct), which makes you eligible for HARP.
FHA Short Refinance Program
The Federal Housing Administration (FHA) initiated a new government loan program to assist homeowners who have seen their property values drop. The program, called the FHA Short Refinance, began on September 7th, 2010 and is slated to run through December 21st, 2012. The goal is to help borrowers in a negative equity position refinance into a more secure loan. Under the FHA Short Refinance program, a lender reduces the principal balance on the mortgage. The reduced-balance loan then passes from the private hands of the lender or investor that owns the loan to a loan that is guaranteed by the federal government. Previous government programs attempted to aid those who are behind on their mortgage payments. The new FHA Short Refi is targeted to borrowers who are current and can afford their payments, borrowers who could not qualify for the different loan modification programs available.
See the HARP Web site for a brief questionnaire to see if you qualify.
Because the lender in the FHA Short Refinance program reduces the principal balance on the mortgage to below 100% and refinances the new balance with today’s rates, the FHA Short Refinance program is worth investigating further. See the Bills.com resource FHA Refinance to learn more about the FHA Short Refinance program.
I hope this information helps you Find. Learn & Save.