Homeowners with substantial equity and good credit may be the primary beneficiaries of lower mortgage refinance rates, while many others could find themselves stuck in their current mortgage, unable to refinance because of lower than expected home values.
High expectations of home values are often disappointed by the reality of current appraisals, which determine the value by comparing similar residential properties that have recently sold and closed escrow. When a lender takes an application for a mortgage refinance, the borrower is usually asked for an estimate of their home value, which may be just wishful thinking.
If any of the recent home sales within a neighborhood are from foreclosures or short sales where the banks have substantially cut the prices for a quicker sale, appraisers have no choice but to use those properties as comparable sales to determine the value of a home for a mortgage refinance.
The mortgage industry is taking steps to ensure more reliable home valuations. Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies, have agreed to establish a home appraisal code to help prevent undue influence on appraisers, which has in the past led to artificially high home values, contributing to a record number of foreclosures.
Also, in order to protect against potential loss, FHA has changed their lending guidelines to require that borrowers pay for two separate appraisals on cash out mortgage refinancing over 85% loan to value, using the lesser of the two values to calculate the maximum loan.
Because home values are such an important issue when refinancing a mortgage, lenders should offer to have the local comps checked, as a courtesy to borrowers prior to spending any appraisal money, since the borrower usually pays for the appraisal, just to make sure the value is close to what is needed in order to fund a mortgage refinance.
Written by Rick Smith: Rates and information on home mortgages, additional mortgage refinance information at ditech home loans
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