Refinancing

A mortgage refinance may seem like a daunting process for many reasons, especially if you are pursuing one for the first time. You likely have multiple questions about which types of loans (fixed-rate mortgage or adjustable-rate mortgage), loan terms, and interest rates are the best fit for you given your financial situation, among other concerns. However, there is also another process to consider when refinancing: a home appraisal.

Home Appraisal & Refinancing

An appraisal is a process that involves an expert’s evaluation of your home. Based on this evaluation, the professional will then provide you with an estimate of your property’s value. Typically, people who conduct home appraisals are licensed by the state in which they work and are unbiased. This means that an appraiser may not have any interest in the estimate of a property. An experienced appraiser will generally compile a report based on his/her inspection and rely on characteristics of the property (condition and amenities, square footage, etc.), as well as existing market trends and recent sales of comparable homes in the area to ascertain your home’s value.

Appraisals Are Commonly Required

Home appraisals are often required before a mortgage refinance. This is because lenders want to ensure that an estimate for a property’s market value has been given and that you (the homeowner) are not attempting to borrow more money than your home is truly worth. An appraisal typically comes with a fee for the borrower and can amount to several hundred dollars. According to the market research firm IBISWorld, the size of the real estate appraisal industry in the United States is estimated at $9 billion and grew at an average annual rate of 0.8% between 2015 and 2020.

Determine The Level Of Interest On A Loan

Your home appraisal can also play a significant role in the interest rate you receive, given that an appraisal is part of what determines your loan-to-value (LTV) ratio. Generally speaking, the lower your LTV ratio, the lower the interest rate you are offered will be because your lender will view you as a low-risk borrower. Should your property’s value increase upon closing, you may have the opportunity to refinance at a lower rate. If your home’s appraisal value is lower than its purchase price, you may be forced to either pay the balance in cash or decrease the purchase price.

May Result In Cash-Out In Refinancing

If your property’s value has gradually increased, you may have sufficient home equity for a cash-out refinance. This essentially replaces your current mortgage with another loan that requires a higher balance due, yet better payment terms and interest rates. This option allows you to obtain the difference between the two mortgages in cash. You can then use this money to pay for other major investments (e.g. a car or your children’s education) or you can choose to save it for future projects (e.g. home remodels).

Remember that if you ever default on your mortgage and enter foreclosure, your lender will sell the property in order to regain its funds (the house serves as collateral). According to Zillow, the average appraisal costs $400. Nevertheless, this figure can often change depending on factors such as a property’s value and size. One of the most effective ways to increase your home’s appraisal value is by performing repairs and improvements. Something as small as making updates to your bathroom or kitchen can help raise your home’s value. If necessary, get more than one appraisal to see how much of an impact on your home’s value these improvements have.

Reach Out To Mathis Title

Reach out to the professionals at Mathis Title Company in Fairfax, Virginia, for more information on how home appraisals affect the mortgage refinancing process. We provide customized real estate settlement services, as well as legal advice, to buyers, sellers, lenders, and agents.

Robin Mathis is an attorney who has more than 30 years of experience in real estate settlement services and who has performed thousands of closings, both small commercial and residential. She is extremely knowledgeable about the buyer and seller sides of real estate transactions. Ann Andreatos is a title agent who has more than 14 years of experience in the title and closing industry. She has a remarkable ability to detect errors in documents and track down lien releases.

At Mathis Title, we know that many different types of legal issues can arise during a mortgage refinance. Therefore, we are dedicated to providing our customers with high-quality, personalized guidance and support through closing. We can order title searches, prepare closing documents, and work closely with your lender, among other things. Call Mathis Title Company today at (703) 214-4020 or contact us online to schedule a consultation with our qualified real estate professionals.

Are you considering whether it’s time to think about refinancing your home? You are not alone by any means. When you refinance your mortgage, that means you’re paying off the existing loan with a new loan. Homeowners will refinance their home loan for many different reasons, including:

• Getting a lower interest rate;
• Reducing the term of their home loan;
• Changing the type of loan (i.e., moving from an adjustable to a fixed rate); and
• Tapping into the home’s equity to use the funds to consolidate high interest debt, make a large purchase, or pay for an unexpected expense.

Many homeowners have recently become very interested in refinancing because of the recent COVID-19 pandemic. Interest rates have dropped significantly, saving a record number of borrowers money. Still, there are some costs to consider when refinancing a home loan. You generally have to pay for an application fee, new appraisal, title search, and other costs. It typically costs between 2 and 5 percent of the loan amount to cover all the fees, etc.

Those extra costs could make refinancing your home not as wise a financial decision as you originally thought. Or it can extend the amount of the time that you have to keep your home before you reach the “break even” point where you start saving on your mortgage costs. Let’s dive deeper to understand when the best time to consider refinancing your home could be.

The Best Times For Refinancing

Refinancing a home is a decision that’s most ideal in certain situations. One of the best times to refinance is when you want to lower the interest rate on your current loan. Because of the fees involved in refinancing, you should consider it when you will save at least 2 percent.

Some lenders will say that there’s enough of an incentive at 1 percent to refinance. That might depend on how long you intend to stay in your home and recoup the costs from refinancing. Run the numbers with a refinancing calculator to determine how much you will save in your situation.

Take the amount that you will save each month and determine how long it will take to reach your break-even point. That will tell you how long you would have to stay in your home at the very minimum before you would start saving money. For example, let’s say that your monthly savings is $300 per month with a refinanced loan. Your refinancing costs come to $3,000. It would take ten months to recoup the $3,000 costs. If you plan to stay in your home for at least another year or two, then it’s worthwhile.

Shortening Your Overall Loan

Another reason that many homeowners choose to refinance their home is to shorten the loan’s term. In a falling interest rate environment, you can oftentimes use the opportunity to shorten the term of the loan and not see much of a change in the monthly payment amount. You will want to calculate the numbers to make sure the new monthly payments will work for you.

For example, let’s say that you have a mortgage on a $100,000 home. The original mortgage term was for 30 years, at a 9 percent interest rate. You refinance to cut the interest rate down to 5.5 percent and a 15-year term. Your monthly payments go from the $810 per month to $825 on your new loan. You own your home faster, while reducing your interest costs for an extra $15 a month.

Converting The Type Of Loan

If you started with an adjustable-rate mortgage and want to switch to a fixed-rate, or vice versa, converting your loan could be a motivation. Adjustable-rate mortgage loans typically offer a lower interest rate than a fixed-rate mortgage for a certain period, such as 3 years. Then the interest rate will fluctuate based on market conditions. Converting to a fixed-rate mortgage can alleviate concerns of higher interest rates in the future.

It can also make sense if you have a fixed-rate mortgage and are planning to sell your home in the time that an adjustable-rate mortgage offers a lower rate. You get lower monthly payments and reduce the interest rate on your loan without having to think about what might happen in the future.

Refinancing To Tap Equity

Tapping into your home’s equity might be another reason to consider refinancing. Some reasons that people tap into their equity include:

• Paying for a child’s higher education;
• Paying for the costs of remodeling their home;
• Consolidating debt; and
• Paying for unexpected expenses like medical bills.

The interest rates on a refinancing loan that taps into your equity is often lower than other available options. Your home’s equity is an important financial asset. So, consider all your options to obtain funds before tapping into your home’s equity.

Work With The Refinancing Professionals

Mathis Title Company is here to help you through the refinancing process. We have decades of experience that gives us the knowledge to provide a unique perspective for each of our clients. Contact us today at 703-865-7880.

So here’s a common scenario: You bought your house several years ago, back when interest rates were higher. Then economic factors have changed, which has caused interest rates to start falling. In fact, by refinancing your home, you can reduce your interest by more than a percentage point, saving you money on interest and lowering your monthly mortgage payments. But what happens to your equity when refinancing your home? That is another important factor you should know a little about before starting the refinancing process.

What Is Equity?

Equity represents the portion of your home that you own. When you first purchased the home, the equity was the home’s market value minus your down payment. Generally, the purchase price of your home is roughly the same as its market value.

As you pay down the principal of the mortgage amount of your home, you’re increasing your equity. The market value of your home also changes over time. So your home’s value might have increased or decreased. To determine the current equity on your home, take your home’s current market value and subtract the total home loan amount that you have left. For example, if your home’s current value is $400,000 and you have $250,000 remaining on your home loan, then you have $150,000 in equity.

Equity And Refinancing A Home

Having enough equity on your home is important because it determines whether you are eligible to refinance your home loan. Your equity is used to determine your loan-to-value ratio, or LTV. The calculation for LTV is the amount that you have remaining on your home loan divided by your home’s current value.

So, in the example above, that would be $250,000 divided by $400,000, which is equal to 62.5 percent. Refinance lenders have different requirements for the LTV you must have on your home that are based on the type of refinance loan you want.

Potential To Increase Or Decrease

Whether your home’s equity has increased or decreased is determined by a number of different factors. Some of these factors include the school zone of your home, crime rates, home values in your area, and how close public safety services like a fire station are. If you’ve added a new addition, such as a bedroom, finished the basement, or a new covered patio, that could also affect your home’s market value. Unemployment levels, interest rates, and other economic factors also play into how much your home is worth.

Current Market Value Of A Home

To get the most accurate estimate of what your home is worth, you need an appraisal completed. This is part of the process when you submit a home loan application. Lenders want to know how much your home is worth and whether it has increased/decreased in value since your last loan.

They will use that information to determine whether or not to approve, amend, or decline your request. A licensed appraiser will compare similar sized properties near your area that have been sold recently and compare it with your home. Sometimes an appraiser will determine the appraised value of your home by calculating what it would cost to rebuild your home. In either case, the current market value of your home is represented by the home appraisal.

The Type of Refinance Desired

The most popular type of refinance loan is what’s known as the straight refinance. This is the type where you want to take advantage of the lower interest rate to refinance your existing mortgage. When the new balance on your old loan is the same as the old balance, it is what lenders will call a straight refinance.

With this type of refinance, you will build more equity on your home faster. This is because your payments have more going to the principal loan amount because of your lower interest rate. You may find out about price related changes to your equity during the appraisal on your home, which may cause your equity to increase or decrease.

The other type of common refinance process is the cash-out refinance. These loans are used to tap into the equity of your home to pay off other debts or to be used for other financial purposes. For example, if you owe $10,000 in credit cards that have an average interest rate of 25 percent, you might want to access your equity to pay it off because you can get a much lower rate on your cash-out refinance.

Many lenders and mortgages that are backed by the government (Freddie Mac) will allow you to take up to 80 percent of your equity on a cash-out loan. So that means you must have at least 20 percent of your equity remaining after a cash-out refinance.

Reach Out To Mathis Title

Work with Mathis Title to have an experienced refinance expert on your team. We’ll be there to help throughout the refinancing process until you are done with closing and receive the best loan for your needs. Call us today at 703-865-7880 to get started.