Why falling home values could hurt plans to refinance

Posted by  on May 17, 2012

Current mortgage rates may have you thinking about refinancing a mortgage. But just because you have good credit doesn't mean you are going to be able to get a mortgage. The value of your home is also important.

Home prices are still falling

Home prices across the U.S. have declined significantly over the last few years. In the fourth quarter of 2010 home prices fell from a year earlier in all 28 major metropolitan areas surveyed by the Wall Street Journal. The drop in home prices shows that the housing market continues to struggle, even in cities that have not been as hard hit. As a result, many homeowners cannot qualify for mortgages because of their credit. Others are reluctant to buy right now because home values could drop further and they don't want to lose money on the deal.

Home appraisals matter

As home prices continue to decline, you could find it tough to get approved for a home refinance. That's because when you refinance the mortgage lender orders a home appraisal to determine how much money can be borrowed. Even if you think your home is worth a certain amount, you might be surprised when you see the appraisal because it may be a lot lower than anticipated. Having a lot of foreclosures in your area is a significant factor that can lower your home value.

There is also a risk of your home equity falling below 20 percent when property values are dragged down. If you refinance, the mortgage lender would require mortgage insurance (MI) on top of monthly loan payments. That could be a big pill to swallow if you aren't currently paying for MI.

Underwater mortgages

Another problem that comes with falling home prices is the threat of being underwater. If your mortgage balance exceeds your home's value, you are underwater. Mortgage lenders will only refinance these loans through the government's Home Affordable Refinance Program (HARP), if you meet eligibility requirements and qualify for the loan.

What's happening in your neighborhood?

Before you go shopping for the best refinance rates, take time to gather information about your neighborhood. Research recent home sales, foreclosure activity, and the average amount of time homes are sitting on the market. While you can easily find a value for your home on various real estate Web sites, the information is not always accurate. You won't really know what the property is worth until an appraisal has been completed.



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