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With mortgage rates at historic lows, we recently (2009) tried to refinance our mortgage. The result? Well, as my son would say, FAIL. For the first time in my life, I was denied a loan. (Actually, this was the second time. I was turned down for a student credit card in college.) Why I was denied the loan is a bit complicated, but it had to do with the appraisal of our home and the fact that we have a home equity line of credit in addition to a first mortgage.

To make a long story short, the appraiser used the tax assessed value of our home as the benchmark. Tax assessments where we live are historically far below the actual value of real estate, so why he took this approach remains a mystery. The irony of it all is that two weeks after the appraisal, a home just down the street worth less than ours sold for about 15% more than the appraised value of our home. As frustrating as this process was, we did learn a few things about refinancing a home loan that I want to pass along.

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1. Start with your current mortgage company: There are several potential advantages of starting with your existing mortgage company when looking to refinance a home. First, the fees may be less. This depends in part on where you live, how long you’ve owed your home, and who your mortgage is with, but we would have saved a couple thousand dollars in Virginia by sticking with our existing bank.

Second, if you have a second mortgage or home equity line of credit with the same bank, the process of refinancing will be much easier. If you go with a different bank to refi your first mortgage, you’ll need to get your current mortgage company to subordinate the second mortgage. This just means that the holder of the second mortgage agrees that the new bank refinancing the first mortgage has first dibs on your home should you default on the loan. While this is a standard process, banks can be really slow to agree to a subordination.

2. Know the 90% rule: If you have a home equity line in addition to a first mortgage, the total debt to home value should be no more than 90%. There are some exceptions and certain government refinancing programs, but this is the general rule for traditional financing (with one important exception–see #3 below). At first glance, the 90% rule may seem silly.

If you are refinancing with the same bank, the value of your home is whatever it is, and the bank is already taking on the risk that you may default. In fact, by refinancing to a lower interest rate, the risk of default goes down. So why do banks require 90%? Because Freddie and Fannie require it, and the bank plans to sell the loans. While this doesn’t make much sense from a consumer’s perspective, it’s the reality of the mortgage market.

3. Know the difference between conforming, super conforming and jumbo loans: Until recently, home loans fell into just two categories: conforming and jumbo. Conforming loans were those for $417,000 or less, and jumbo loans were for anything above $417,000. The difference between these loan types is that interest rates on conforming loans or typically less than the rates on jumbo loans. Why? Larger loans are viewed as involving more risk, and a lender’s ability to sell a jumbo loan is more limited than it is for a conforming loan.

Today, however, things have gotten a little more interesting. There is now a loan type between conforming and jumbo that goes by several names, but super conforming is the name I’ve heard the most. Super conforming loans raise the conforming loan limit, but only in certain expensive areas of the country. I happen to live in one of them, and my home loan is considered a super conforming loan. Who cares? You should if you are looking to refi your home. The reason is that some rules are applied differently depending on the type of loan you are refinancing.

According to my mortgage broker at Wells Fargo, super conforming refinances must meet the 90% rule noted above, while conforming loans do not. Conforming loans have other requirements to satisfy, of course, but they are different. The key point, however, is to know your type of loan and seek advice from a mortgage professional who understands the requirements of your specific situation.

4. Expect to be shocked by the appraisal: It seems like home appraisers just can’t get the number right. A few years ago, they were spitting out numbers that were ridiculously high. Today they’ve gone the other way, with valuations ridiculously low. In my case, the appraiser used the tax assessment, which is an unreliable measure of value. So why did he use it? It’s safe. It’s wrong, but it’s safe. Unfortunately, it also wrecked the refinance. Frankly, there’s not much you can do about it, but it’s good to know in advance what you’re up against. If you think the appraisal may be close, recognize that you could spend several hundred dollars for nothing.

5. Stay in contact with your mortgage broker: I have to say I was incredibly disappointed in the Wells Fargo mortgage broker for several reasons. First, he was very slow to respond after I sent him all of my paperwork. A good week to 10 days went by before he finally called me back. Second, he told me that as long as my first mortgage was less than 80% of my home’s value, I’d be ok regardless of the home equity line of credit.

This advice turned out to be wrong, as he later acknowledged. And third, as it became clear to him that my refinance would not be approved, he stopped contacting me. I called him repeatedly for well over a week before he finally called me back to give me the bad news. If you detect this kind of poor customer service, consider contacting a different broker. There are plenty out there that provide professional and timely service.

6. Negotiate the terms of the refinance: Even with the big banks, some terms can be negotiated. Brokers have a range of quotes they can provide in terms of rates and points. At the high end, they make more commission, but they can sacrifice some of that if they really want your business. The point is that shopping around for home loans and refinancing can pay off.

7. Understand the terms of a “free” float down: If you’ve ever financed a home, you’re familiar with locking in the rate pending approval of the loan. A typical mortgage rate lock is good for 30 to 45 days, during which time you are guaranteed the agreed interest rate, even if rates go up. But what if rates go down during this time? To address this possibility, many banks advertise a free float down. A float down allows you to take advantage of a lower rate during the lock period, but typically you can only float down the rate once during the lock period.

While many banks advertise this float down as free, be sure to understand the terms. While it is true that many financial institutions won’t charge a fee, the float down often will not lower the rate as low as you’d get if you were just locking in the rate for the first time. In other words, if the rate went down by 1/2 percent, the float down might lower your rate by just 1/4 or perhaps 3/8 of a percent. The point is that most float downs are not really free, and it’s important to understand the terms of the offer before you lock in the initial rate.

As a final note, I should add that we haven’t given up on refinancing our home. Fortunately, our current loan has very good terms, but we’d still like to get an even lower rate if we can. I’m also seriously considering refinancing to a 15 year note (we currently have 25 years left on a 30 year mortgage). I’m just hoping that the next appraisal reflects the true value of our home.

Author Bio

Total Articles: 1118
Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Article comments

Matt Jabs says:

Great info DR.

I am currently upside down on my home and am pretty upset that I let myself get into this sitch. We purchased 2.5 years ago for 165K, have a 1st & 2nd mortgage, but now our home value is below what we owe. Wife & I both want to sell but are afraid it is impossible to do w/o a loss.

We may take that loss and get out before the entire economy crashes and values plummet further and further.

Jesse says:

I just finished a refinance that took almost six months to complete due to things out of our control (broker disappeared for a few months, computer problems, etc) and I think you are dead on with #4 here.

We use some self appraisel and online appraisal sites to keep an estimate in mind of what the house is worth, and our appraisal was no where near the number we thought. It was pretty disappointing but we did end up getting it done.

Ron Woods says:

You can very easily get the lower mortgage rate, by simply adding $100 to
$150 per month on your payments. The extra payment is 100% applied
to your principal, which effectively lowers your interest; and pay back period!

Also, you do not have appraisal and bank fees to worry about wiith the extra
payment program. You can also have a 13 month yearly payment squeezed
into the 12 month payment cycle, to effectively get a lower interst rate.

Great first-hand experience…I haven’t written much about refinancing as I’ve never done one (and wouldn’t be able to offer people much advice), so I’ll definitely point people with refinance questions here!

Manshu says:

That’s a great account of how you faced this situation yourself. Like David said, this is a very useful post for someone going through the same experience.

virginia says:

This summer I chatted with 2 local mortgage brokers (and the existing lender, a big Bad Bank) about refi for an investment property (an entire other kettle of fish, with loan to value ratios now max 70% – so just using any of those home equity lines they hounded me to take when i financed the property in feb 08 puts me immediately over the LTV. They don’t raise the interest rate on the home equity to ‘signal’ to you to not use it – it’s still 2.5% – but if you touch it, you get burned.

The big issue is APPRAISALS: with the new regs that came in this summer stating that the lender, not the broker, must select the appraiser, the appraisals are being done by ‘armchair appraisers’ in distant markets with no local knowledge. And, they have every incentive to use nothing but foreclosures and short sales as comps. In our part of VA where one zip code straddles 2 MLS areas, 3 counties and 1 municipality, one broker told me of a couple with credit score over 800 denied a loan because the very well priced house’s appraisal came in even lower – the appraiser was out of state and used only foreclosures in the lowest priced county, not in the municipality where the house – and true comps – were.

Until the ‘rat’ of foreclosures moves through the market python, and speculators, investors and owner-occupiers start to be able to flip them for a little more $, AND we get back to LOCAL appraisals, this will continue to be a problem. People have to speak up to let legislators know that in an effort to more effectively regulate appraisals they have actually made the problem worse. Try to find a lender that is truly LOCAL who will hire an appraiser who will actually VISIT THE HOUSE and pull ACCURATE COMPARABLES. Don’t forget about credit unions and Farm Credit. Ask if they are actually the lender, how long they will hold the note before they repackage and sell it, and whether they are hiring the appraiser locally.

DR says:

Virginia, you are absolutely right about appraisals. And as an owner of several investment properties, the different LTV requirements have effectively prevented us from refinancing, too. And I’m guessing that we are looking at 3rd quarter of next year at the earliest before the situation begins to improve. The recession may well be over, but employment won’t begin to improve for at least several quarters.

John says:

We just had the same problem with Wellsfargo, everything was good, broker kept in touch up until the appraisal then he decided that email was a good way the let us know the appraisal came in Lowe the he expected and that the rate would go up a little. I was ok with that, than he emails back 2 days later and tells me that the loan is now in decline status. Now I’m out 500.00 dollars and he won’t even call me back. He emailed me the customer service number. Very professional

Jim says:

I had a similar experience with this bank. I feel like the person I was working with had to know my appraisal wouldn’t come in where we wanted it. I’m out $500.00 too. I’m going back to work and use my additional income to pay down my mortgage pronciple, upgrade my home finishes and save closing cash. This refinance has been more difficult than the initial mortgage approval.

Virginia Jim says:

I had a similar experience with this bank. I feel like the person I was working with had to know my appraisal wouldn’t come in where we wanted it. I’m out $500.00 too. I’m going back to work and use my additional income to pay down my mortgage pronciple, upgrade my home finishes and save closing cash. This refinance has been more difficult than the initial mortgage approval.