Barriers and Problems Refinancing a Home Mortgage in 2009
My quest to refinance my home mortgage continues. Rates are around 5.00% with no points for a 30 year fixed, last I checked. The biggest barrier home owners face (and that I am facing) is that falling home values make it difficult to meet minimum qualifications. Even with a solid credit report and score, it is difficult to qualify for a loan.
Loan to Value Ratio (LTV)
Loan to Value ratio is a ratio of between the amount of the loan, including a second mortgage, and the current market value of the house.
For example, if a borrower wants $180,000 to purchase or refinance a house worth $200,000, the LTV ratio is $180,000/$200,000 = 0.9 or 90%.
In the United States, conforming loans that meet Fannie Mae and Freddie Mac underwriting guidelines must have an LTV ratio of 80% or less. Higher LTV ratios indicate less equity and more risk for the lender. Accordingly, qualifications become much more stringent and many lenders aren’t willing to take the chance.
And as home values drop, many owners find themselves with an unfavorable LTV ratio despite attempts to build equity such as home improvements, upgrades, and aggressive payment plans.
Options for High LTV Ratios
So what happens when you can’t put 20% down or the value of your home has slipped? Traditionally, the borrower can pay for private mortgage insurance (PMI) or take out a home equity line of credit (HELOC).
Private Mortgage Insurance (PMI)
Private mortgage insurance is an additional fee paid by a borrower to protect the lender in case of default. This fee goes to an insurer who guarantees the payments.
PMI is calculated based on LVT ratio, credit score, and loan type.
For instance, take someone with a 95% LVT, good credit, and a 30 year fixed loan. Estimated PMI is 0.78% of the loan, annually. 0.0078 x $180,000 = $1404 per year = $117 per month.
Home Equity Line of Credit (HELOC)
A HELOC is a line of credit with a maximum amount, similar a credit card. You don’t receive a lump sum, but rather withdraw and repay the line over the agreed term. It features a variable interest rate and your home equity is used as collateral. HELOC’s can be used to pay the portion of the total loan in excess of 80% however it’s usually a much higher interest rate.
What do you think? What is your current LTV?
Image courtesy of WoodleyWonderWorks
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8 Responses to Barriers and Problems Refinancing a Home Mortgage in 2009
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January 14th, 2009 1:16 pm
We just signed paperwork for a refinance today – 5% on a 30 year fixed with no points/origination – just some closing costs with a payback period of 13 months.
the only thing we have to worry about now is our LTV ratio. We have a good appraiser friend who is working with our bank to do our appraisal, so we know he’ll do his best to get us near where we need to be – so that should help. But he’s not unethical, so if we’re not there he’ll tell them.. Here’s to hoping we still have a 80/20 LTV ratio!
January 14th, 2009 3:36 pm
@Peter, Sounds like a great deal(especially the 13 month payback). Do you have any educated guess what your LTV ratio is? Any comps in the neighborhood? I hope it appraises. Good luck!
January 15th, 2009 7:51 pm
Heya Ethan -
I hope you don’t mind, but I’m putting a link to this on my blog.
January 16th, 2009 10:51 am
Hey Larry, Feel free to link away.
April 30th, 2009 2:42 pm
We passed the credit report and the LTV-but we cannot refinance because underwriters will not accept the apprasisal-(bank appointed appraiser) due to 30 mile radius requirement for comps-lack of sales in our area to get comps.
We have never beemissed or been late on a payment-credit is high 700’s and yet-no way to take advantage of low interest rates.
We have had 2 appraisals-one in 2008 @ $350k and another in 2009 @ $310k-we need mortgage of $200k. What a mess – in 30 years we have never been refused a mortgage-and have enough cash, stock, etc to pay off the house if we needed to-as well as 2 good incomes.
May 19th, 2009 2:59 pm
I agree: Credit score of over 800 but since our area has several repo houses we can not refinance. We have never been late or missed a payment (for anything). However, the GOOD people are being penalized for the problems in our economy. Tha is NOT fair to people who still pay on time. What is a person to do?
June 21st, 2009 10:31 pm
We’ve been carrying $900K on two mortgages (two houses) for several years. This is the first time we’ve owned one house in over 20 years. We finally sold the house we’ve been living in for the last 5 years. We won’t make any money on the house, I think we’ll get a check for $2000. at closing – a down payment to the movers.
We have the same jobs, excellent credit, never late, no bks, autos all paid, etc. We sold the house that we owed $525K on and kept the house with the $375K mortgage. The kept house we’ve owned for over 20 years, my spouse grew up in the house, it has been in the family since 1956. It’s a historically registered grand old victorian that needs work. We purchased and paid for over $60K worth of appliances, flooring, lighting, plumbing, etc. We need an improvement loan of another $350K to do everything we need to do (an addition, HVAC, insulation, solar panels). The heating bills go as high as $750 a month in the winter for an old uninsulated house (we live in Massachusetts). We should be able to cut that by two thirds, if not more.
We’re looking at a total loan of $750K, which will give us a dream home and cut our expenses considerably from the $900K we have been carrying. Our problem is the loan to value – we can’t find a lender. We have thought about renovating it as a two family for the higher loan with the intention of living in the whole thing ourselves – we don’t know if that is legal. Anyone out there have any suggestions?
June 25th, 2009 11:10 pm
Troy D,
We’d probably need to know a little more about the property and your income to make any suggestions… How much equity do you have in the property you’re looking to renovate today? Can you put any other money down?
Fred