Help me understand the refinancing process.

January 12, 2009 12:00 PM

Help me understand how my home equity loan, declining market values, and in-progress home improvements will affect my refinancing options.

Long time reader, first-time poster. Help me MeFi!

My wife and I bought our first house about a year and a half ago at, in retrospect, the height of the interest rates curve. We have an 80/10/10 deal - 80% mortgage, 10% down payment, and 10% home equity loan. Since then, we've done some pretty major landscaping that increases our "curb appeal" and are in the middle of an unexpected bathroom renovation from some bad plumbing. With interest rates so low, we are looking into refinancing, but there are a few things I'm unclear on:

1) As I understand it, a refi will require a new home appraisal. If this is an interior & exterior inspection, the appraiser will see a bathroom currently stripped completely down. Will this negatively affect our appraisal, or can we simply explain that it will all be fixed up soon? Is there any way this can actually increase the appraisal since the final design will be much improved, or will the appraiser not take our word for that? Should we wait until the project is finished to begin the refi process?

2) To get the best rates, it seems one has to have 80% loan-to-value ratio, or at least 90% in other cases. Does this only apply to the first mortgage, or does it include the home equity loan as well? Clearly, we overall still have only slightly more than 10% equity, or less if the appraisal comes out much lower due to market conditions. On the other hand, if we only refinance the first mortgage, then it will be close to 80% of the value of the house. So how exactly does the home equity loan affect this process? If it helps, my wife and I both have excellent credit.

I have a general understanding of most of these issues, but I thought someone out there could explain more succinctly for me. Thanks!

posted by RobotNinja to work & money (5 comments total)

As I understand it, a refi will require a new home appraisal.

Contact your current lender, and see if they have any no-appraisal refinance options/offers for current customers. I was able to do this through Wells Fargo Home Mortgage last year
posted by misterbrandt at 12:50 PM on January 12

Misterbrandt may have done a streamline refi with no appraisal last year, but this year you will most likely need a new interior/exterior appraisal, what with declining property values and general upheaval in the mortgage industry. You should definitely wait until the bathroom remodel is complete to start the refi process. Also, don't expect your new landscaping to translate into a higher market value.

If you refi, you will be required to payoff the HELOC unless you can get it subordinated behind the new first mortgage. Even if you can get it subordinated, it will still be figured into your CLTV (combined loan-to-value) so you're at 90% LTV or CLTV any way you slice it. At anything above 80% LTV you will need to consider FHA, as the mi factor on FHA is much less than conventional and rates are generally similar.
posted by curlyelk at 4:33 PM on January 12

will you post the outcome of your experience, please? I'm sorta wondering the same thing... but I don't have a bathroom renovation going on.. just falling house prices in my hood.
posted by mhh5 at 4:45 PM on January 12

First, do call your current lender and see what they can do. Someone I know who just refinanced was given a no-fee, no-appraisal loan, so they do still exist, even if they are rarer than they used to be.

Second, the landscaping probably won't change the appraisal. When my house was appraised the other year, things like landscaping were basically translated into "acceptable/not-acceptable" -- there wasn't any detailed focus on the landscaping other than that I didn't have stacks of old refrigerators and cars up on blocks in the yard.

Third, although I know money doesn't grow on trees, you do have the option of paying to get the house appraised yourself (though you'd be wise to use the appraiser your lender prefers, obviously). Then you can use that valuation to decide whether or not it is worth discussing things with a lender.
posted by Forktine at 7:44 PM on January 12

Just to follow up, the others are right. The landscaping or even the renovations will not affect the value of the house. What you should be more concerned with in terms of value is the housing values of other comparable homes in the area. That will really impact how much loan you can get. You may even end up only being able to borrow less of what you need to cover the previous loan if the value has dropped significantly.

I do also suggest you talk to a few banks to just tell you straight how much you qualify for in refinancing. Because if you have good credit, banks do want your business.

In any case, good luck.
posted by visiondecor at 11:52 PM on June 2