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How to Refinance When Home Values Decline

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Authored by Casey Quinn in Mortgages
Published on 01-29-2009

Over the past few years, in many markets around the world, potential home buyers found themselves struggling to purchase a home. With the cost of real estate rising and not wanting to miss out on owning a home, consumers agreed to risky loans in order to qualify for their mortgage. These risky loan types included adjustable rate mortgage (or ARM loans) and interest only loans. The benefit of this type of loan was that it was offered at a low rate for a set period of time and would allow the consumer to make small payments they could afford.

The idea for most consumers was to live in the house and sell before the loan terms changed over which would result in a very high payment they could not afford. Unfortunately, the housing market crashed leaving many now trying to refinance their unfavorable terms in order to avoid foreclosure. So, how do you refinance your home when the value of the house has declined? Here is what you need to know to work with your lender to refinance your mortgage.

The first step in the refinance process is to take a hard look at your own expenses and come up with a monthly number you feel you can afford. The number you determine you can afford needs to be reasonable (don’t expect to drop thousands a month) in order to negotiate with the bank. Get out of the flip mentality and focus on if you had to live there for thirty years, what monthly figure could you cover. Once you have the number in your hand, it is all about trying to find ways to get there.

The second step in the refinance process is to talk with your lender or mortgage broker. Sit down and review what your goals are in the refinance process. With a set monthly amount in mind, lenders can quickly figure out what repayment options and terms are best for you. The best thing you can do in this market is to lock into a low fixed rate for a long period of time. While not the sexist loan, it is constant and reliable. In an unstable market, it is the responsible thing to do.

If you are unsure you will qualify for refinancing your loan keep this in mind; lenders want you to keep your home. They are not in the real estate business. They are not the enemy. They are in the banking business. Bankers want you to succeed in your repayment of the loan and will work with you to achieve that end. After you meet with your mortgage broker and find terms that help you get to your ideal monthly mortgage payment an appraisal will be ordered to confirm the current price of your home. If all goes well you should be in a good condition with your refinancing. In fact, for new home owners a refinancing can help lower your payment by removing private mortgage insurance (PMI) which many homeowners have on their loans as a result of not putting down enough in the first place.

Although the closing on the refinance will cost you since you will have to pay for closing and application fees in addition to money down, in the end, the drop in your rate and the length of the loan should lower your monthly payment. This alone will make it worth it for you to refinance when your home value declines.

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