What Do You Do When Your Home Appraisal Comes In Low?

Mortgage Refinance Questions – What Do You Do When Your Home Appraisal Comes In Low?

November 2nd, 2011 |

Author: yroth

This is a mortgage question that I get every now and again. When refinancing your mortgage, a low home appraisal can have a big impact on the refinance transaction.

When refinancing your mortgage, if your loan to value ratio exceeds 80%, private mortgage insurance PMI is required to go on the loan.

What that means is that in addition to paying the principal and interest portion of the loan back and in addition to including your property tax and insurance installment, you have to pay an addition insurance premium called PMI.

So lets say you want to refinance your mortgage at $200,000 and you think your home will appraise for $250,000. The loan to value ratio is 80%.

You calculate your mortgage payment, you see the new rate…everything is good. There’s benefit and you’re saving money. Great!

Now you appraisal comes back and the value isn’t $250,000 it’s 225,000!

So PMI is required. Instead of making a mortgage payment that you estimate will be $1350/month now your payment increases to $1410/month. What do you do?

Here are your options:

1. Stay the course. If there’s still benefit to you even including the PMI payment, move forward. You can request that the PMI be removed after 2 years as long as you verify that you have 20% in equity in the home at that time.

2. Pay your loan down so that your new loan is at the 80% loan to value ratio. Not sure I’d recommend this. It depends on how much you have to pay it down, how long you plan on owning the home and how much you have in savings.

3. Consider another loan type. Look at an adjustable rate mortgage ARM or shorter term loan to see if there is benefit to you going with those loan types. If a lender paid mortgage insurance LPMI option is available, consider that.

4. Rebut the appraisal. This option is generally futile. Unless the appraiser made a material mistake (i.e. got the home square footage wrong or missed a bedroom or bathroom) it’s unlikely the value will be changed.

5. Cancel the loan application and go with another lender. If you choose this option, the new lender will want another appraisal which you’ll have to pay for. This will cost you roughly $350 – $400 (or higher) depending on your home value. In addition, a new appraisal is not likely to show a value that will be wildly different from the first appraisal – unless the first appraiser did an incompetent job.

So if your appraisal comes in low and you have to pay PMI, consider whether there is still benefit to you. If there is, don’t ignore there transaction.

Remember, you can always request the PMI be removed after 2 years.

I hope this helps!

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