Published: December 15, 2007 11:05 pm      

Dissolving home equity melts refinance options

EDMOND — By the end of 2008 rates on more than two million home mortgages are scheduled to increase. If your home is financed with one of these types of mortgages, the time to refinance is now. This is because of several important factors in the current housing market.

Some home values are slipping which erodes equity. For some homeowners to qualify for the best mortgage products and rates they need the maximum amount of equity possible. For many, reduced equity will translate into limited options when they do finally decide to refinance.

Much of the math lenders use to calculate refinance products is directly tied to the amount of equity in a home. The higher the amount of equity, the more options are available; the lower the equity, the fewer options.

If your current mortgage equals 80 percent or less than your current home value, your options are pretty well open ended allowing you to choose among the best mortgage products and rates depending on your credit score.

But as equity shrinks so do the available options for quick and easy mortgage products. Lower equity usually translates into higher rates and more strict underwriting guidelines. The major tick marks for higher rates are 85 percent, 90 percent and 95 percent.

Once you owe more on your home than its appraised value, you are pretty well out of options in the current state of the real estate market. Just a few months ago, those lenders who were eager to lend 100 percent or even higher have either gone out of business or are seriously tightening these guidelines.

The national news media is reporting that property values across the country are dropping by as much as 15 percent and higher. A careful look at these reports will reveal the markets with the greatest reduction in property value also are those markets that realized unrealistic rises in property values during the past three years.

Locally our property values do not experience such rises and falls in value. In a typical year, property values across our market rise between 2 percent and 5 percent. This makes real estate investments safe for the long haul and provides a layer of protection from the current nationwide real estate value crisis.

Here’s another issue with our local property values. Appraisers have become more conservative in the way they value property. In the wake of declining property values, appraisers are issuing more conservative property values than in recent years. One of my recent customers refinanced her home thinking that the value was $238,000. But the appraisal came in at $230,000. It made only a small difference in the percentage of the loan, but it required she and her husband to bring the difference in cash to the closing.

My observation is that many who need to refinance are sitting on the sidelines hoping for lower interest rates. All the while the value of their property could be shrinking. The inventory of unsold homes in this market continues to grow and while this figure does not necessarily translate into reduced property values, it can, and most likely will translate into stagnating property values.

The risk these folks are taking is that interest rates will be no higher next year than they currently are. While this may prove to be true, the same cannot be said for their property values. So what can you do?

• Work some math: A simple way to find out what your home is worth is to ask three real estate agents for a figure, call it, “If I needed to sell my home right now.” Another more accurate way to determine the value of your home is to hire an appraiser to prepare a complete report. This will cost you about $350, but it will provide you with an accurate value of your home.

• Get some counsel: You need to find someone who will spend the time necessary to help analyze your specific situation. The news you discover may not be the happiest, but having the facts is critical to making the best decision for you and your family.



TREY BOWDEN is a licensed mortgage professional in Edmond.