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 loan and $28,000 on the second. What kind of refinance should we be able to get?
A: The good news is that you have equity 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 mortgage 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 appraisal 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.