Q: We paid $210,000 for our home in 2000 and it was supposedly worth $240,000 in 2008.
Now our home is supposedly worth $200,000 and we owe $140,000 on the first loanA Loan is an amount of money that is lent to a borrower, who agrees to repay it plus interestInterest is money charged for the use of borrowed funds. Usually expressed as an interest rate, it is the percentage of the total loan charged annually for the use of the funds.. and $28,000 on the second. What kind of refinance should we be able to get?
A: The good news is that you have equityYour share of ownership in a company. Stockholders are often referred to as equity investors, because they invest in the equity of a company. in your property. You owe $168,000 on a property that’s worth (Let’s assume) $200,000. That’s not quite 20 percent equity, but you’re only $8,000 off.
The best choice for you is to do something known as a “cash-in” refinance, where you put in cash in order to have enough equity to refinance without needing private mortgageA Mortgage is a document granting a lien on a home in exchange for financing granted by a lender. The mortgage is the means by which the lender secures the loan and has the ability to foreclose on the home. insurance (PMI), which is so expensive these days, that it could wipe out any savings you’d see in a refinance.
As you know, the best loans with the lowest interest rate are 80 percent first loans. But you have to have 20 percent in equity. If you put in $8,000 plus pay closing costs, you’ll wind up qualifying for a very inexpensive loan.
If you can afford, it, choose a 15-year loan, which is currently available at interest rates below 4 percent (for homeowners with sufficient equity, strong finances and an excellent credit score). That way, you shave 5 years of payments off of the loan (assuming you haven’t reset your loan term by refinancing since 2000 when you bought the property and are 10 years into the loan).
If you’re looking to keep your payments low, you may not want the 15-year loan but you should remember that when you refinance a loan, you start over on the 30-year loan term. If you are five years into a loan, you have twenty-five years left but if you refinance, you’ll now have 30 years to pay the loan.
You shouldn’t really be paying any more than you already are. In fact, you might pay a little less because your loan amount is less than when you bought the property.
You won’t really know whether you will have an appraisalAn Appraisal is the opinion of an appraiser, who estimates the value of a home at a specific pointA Point is one percent of a loan amount. in time for the purpose of financing or refinancing a home. problem with your home until the bank orders the appraisal. While you might be right and the appraisal may come in at the number you’re expecting, it may surprise you and come in higher allowing you to refinance the property without worrying about PMI or not having enough equity in the property to get the best deal possible.