Recently a couple of my clients returned to me to refinance their Washington homes wanting to take advantage of the current historically low mortgage rates. The biggest gamble with a refinance is what the appraised value comes in at. We know at the beginning of the application if someone is qualified based on their income and what their credit scores are. We wait to until we receive the appraisal to learn what has been decided to be a current value based on what other like homes in the neighborhood have recently sold for. If a home's loan to value is over 80% based on the the appraised value, the home owner has options depending on what the actual loan to value is.
Private mortgage insurance has varying rates depending on risk factors, such as credit score, appraised value, loan program and income. The premium can be paid monthly, annually, by the lender (lpmi), single premium (paid once) or split premiums (a combination of monthly and a lump sum premium). If paid monthly, private mortgage insurance is set to be dropped from ones mortgage payment when the principal balance reaches 78% loan to value based on the original transaction.
Here's an example. A couple from Ballard want to refinance their mortgage with a total loan amount of $400,000 with no cash out (rate-term refi). They have excellent credit scores (above 740) and have locked in a 30 year fixed at 3.875% (apr 3.978) with a principal and interest payment of $1881. Mr and Mrs. Ballard would like the appraisal to come in at $500,000 or higher to meet the 80% loan to value criteria. Based on what their neighbors have sold their homes for recently (6-9 months) the appraisal comes in at $480,000 producing an 83.3% loan to value. It's disappointing at first however Mr. and Mrs. Ballard and ready to review what their possible options are.
Bring in cash to make up the difference. $480,000 appraised value x 80% LTV = $384,000 possible loan amount with no mortgage insurance. $400,000 proposed loan less $384,000 = roughly $16,000. NOTE: this figure could probably be reduced with the use of rebate pricing (increasing the rate to reduce the cost) and other closing costs would be reduced based on the reduction of loan amount.
Add monthly private mortgage insurance. Based on their scenario, the rate would be 0.29% of the loan amount divided by 12 months = $96.67 monthly pmi. This premium will remain in their payment until the principal balance reaches 78% of the appraised value of $480,000, which should take approximately 41 months. If Mr. and Mrs. Ballard decides to go this route, their principal, interest and mortgage insurance payment will be $1978 and their initial closing cost will not be increased (apr 4.056).
Pay a one time "single premium" mortgage insurance. Instead of increasing their monthly payment, Mr. and Mrs. Ballard can opt to pay pmi in one lump sum and be done with it! The rate, based on their scenario, is 0.72% of the loan amount = a one time payment of $2880. This does increase their closing cost however their principal and interest payment will remain at $1881 (apr 4.039).
Mr. and Mrs. Ballard decide they like the single premium option considering that they won't have a mortgage payment due for one month after the closing of their new refinance and they're receiving a refund of the balance of their existing reserve account a few weeks after closing from their existing mortgage servicer. Plus they'll break even with the one time mortgage insurance premium quicker than the monthly option. Both pmi options allow them to not dip into their cash reserves and to still proceed with the refinance.
In this climate, sometimes neighbors (or banks) have to sell homes for less than what they or you would like and appraisals may come in lower than expected. It's good to know that there are options for when this happens. A piggy back second mortgage may be something to consider too with this type of scenario.
NOTE: If Mr. and Mrs. Ballard's existing mortgage qualified for a Home Affordable Refinance, there would not be any private mortgage insurance required and if their exisiting mortgage was FHA, they may have opted for a streamlined refinance without an appraisal (no potential loan to value issues) although the pmi rate is currently less expensive than FHA's mortgage insurance.
PS: For the record, appraisals may come in higher than estimated too.
If you are interested in seeing obtaining a rate quote for a refinance or purchase on a home located anywhere in Washington, please contact me.