JEANNE REARDON - Attorney at Law

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Real Estate Law Blog

June 2012

What Borrowers Can Do About Low Home Appraisals

With record-low interest rates potential home buyers are seeking to buy and current homeowners are seeking to refinance.  But low appraisals are making it difficult or even impossible for some borrowers to take advantage of this boon in record-low interest rates.
The problem stems from the fact that home prices have plummeted even further than first anticipated, as wells as laws and rules enacted by legislators and lenders in the wake of the financial crisis which seek to eliminate inflated appraisal valuations and improper pressures on appraisers as seen in the housing boom have now resulted in an “over-correction” or unnecessarily conservative valuations. 
Also, accurate valuation for appraisals may be hard to come by when sales in the real estate market have been so anemic.
There are steps, however, that you can take for a purchase or refinance transaction in order to increase the odds that your mortgage is approved and your deal gets done. 
Some of these steps include the following:
•  Know what the range of value is for your area by looking at comparable sales from the last three to six months;
•  Accompany the appraiser during the inspection, pointing out features and improvements that add to the home's value;

  Although chances are slim, request that the lender review the appraisal findings, especially if you think the appraisal 
    is unusually low, contains factual errors, such as the number of bathrooms and so forth, or you have more recent   
    comparable sales that were not available at the time the appraisal was initially done and submitted; and

•  Start over with a new lender if your original financing falls through.

For more information on this topic, see Wall Street Journal article entitled, Fighting Back Against Lowball Home Appraisals.

Mortgage Refinance - Shortening Loan Terms

Shortening Loan Terms
The New York Times
Published: June 1, 2012
LOW interest rates are making it easier for homeowners to reduce their  mortgage  payoff  times considerably.
Almost a third of those who refinanced in the first quarter cut the duration of their mortgages to 15 or 20 years from 30, according to a recent refinancing report by Freddie Mac. The 31 percent who shortened their terms represented the second-highest level since 2002, when 35 percent took out shorter-term loans, the data showed. In the fourth quarter of 2011, 34 percent had reduced their mortgage terms. The all-time high occurred in 1992, with 42 percent refinancing into shorter mortgages.

“Historically low rates and an average three-quarters of a percentage point difference between 30- and 15-year mortgage fixed-rate mortgages are important drivers for moving to a shorter term,” Frank Nothaft, Freddie Mac’s chief economist, said in an e-mail.

The 15-year fixed-rate loan averaged 2.97 percent nationwide, according to Freddie Mac’s latest survey, released on Thursday. That was the lowest rate since the agency started keeping track of that loan in 1991. The 30-year loan also set another record low, at an average 3.75 percent.

The switch to shorter loan terms may also be part of a trend to deleverage and reduce debt levels, which started in the economic downturn. “People are taking control of their own equity — they’re paying it down quickly,” said Michael McHugh, the president of Continental Home Loan and president of the Empire State Mortgage Bankers Association.
Some people decide to refinance into a shorter mortgage after they have been promoted at work, said Kate McCue, an executive vice president of McCue Mortgage, a direct lender in New Britain, Conn. She suggests that borrowers look at their own financial situations, including how long they expect to live in their homes, before deciding on a shorter refinancing.

Shorter loan terms often mean higher monthly payments. But this may be offset in part by the capturing of very low rates. In the first quarter, borrowers with 30-year mortgages lowered their rates by a median 1.5 percentage points, or a savings of about 27 percent of their rate, the largest reduction recorded in Freddie Mac’s 27 years of analyses.
A shorter term may have some tax advantages as well. You restart the mortgage amortization and pay more in interest initially, Mr. McHugh said; this results in a good tax deduction for a few years.

Shorter loan terms of, say, 10 or 15 years also allow borrowers to build equity much more quickly, even when home prices are not appreciating, Mr. McHugh noted.

Borrowers can achieve similar results by paying down the balance when they refinance, by adding in extra cash — 21 percent of borrowers did so in recent months, Freddie Mac found.

If their finances or jobs are tenuous, some homeowners may be more comfortable refinancing into 30-year mortgages, then making bigger payments as often as they can, Ms. McCue said. If they suffer a financial setback, she said, they will then have the flexibility of falling back to the standard monthly payment.

If you’re not sure which term works best for you, begin your research by picking a good mortgage calculator online and crunching the numbers for various loan terms, Ms. McCue said.

Those who decide not to refinance can still pay off their mortgages faster by sending in an extra month’s payment once a year, said Chanda Gaither, a housing counselor at La Casa de Don Pedro, which works on affordable housing and neighborhood development in Newark. She has seen families save up a small amount of money every month and then annually apply it to the principal. “Or take it out of your tax return” when the refund comes in, she said.

If you made an extra month’s payment each year, your 30-year mortgage could be paid off in about 23 years, Mr. McHugh said.