Refinance Home Loans and the Home Value Question
Posted on Wednesday, June 30th, 2010 at 6:16 am
Lower refinance home loan rates are raising the volume of applications but, will a potential refinance boom be offset by uncertain home values? Estimates for the fallout of refinance loan applications range from 50% to 65%, due in part from low appraised home values.
Borrowers with substantial home equity and good credit may be the primary beneficiaries of low com”>refinance rates, while many others could find themselves stuck in their current home loan, unable to refinance because of lower than expected home values.
High expectations of home values can be reduced by the reality of appraisals, which determine market value by comparing similar properties recently sold and closed escrow. When a lender takes a refinance home loan application, the borrower provides an estimate of their home value, which may be just wishful thinking, considering market conditions.
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 refinance loan.
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 refinance home loans over 85% loan to value, using the lesser of the two values to calculate the maximum loan amount.
Because home values are such an important issue when refinancing, 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 refinance home loan.