A large majority of homes in American lost value after the housing crisis. Many have come back, but that doesn’t mean they are worth the amount borrowers need. What do you do if your home isn’t worth what it used to be?
The good news is there are ways to refinance no matter what happened to your home’s value. The programs available to you depend on just how much values dropped. Did they drop just enough that you have a higher LTV, but still less than 100%? Or did they drop so much that you are upside down, meaning you owe more than the home is worth?
If you just have a high LTV, you may be able to refinance with a conventional loan. You’ll need good credit and stable income. If you have those two things, you should be good to go.
If you are upside down, you’ll need a government program. Both the VA and the FHA have streamlined programs that don’t consider the home’s value.
The VA IRRRL
The VA Interest Rate Reduction Refinance Loan allows veterans with a current VA loan to refinance their home no matter the value. The VA does not require lenders to order another appraisal. They don’t even require lenders to pull your credit or verify your income.
The VA IRRRL program helps veterans lower their payment, shorten their term, or refinance out of an ARM into a fixed rate with little verification. All the VA requires lenders to focus on is your mortgage payment history and the net tangible benefit for the loan.
The VA requires you to have a solid 12-month payment history. You may have one 30-day late payment in that time. However, it can’t be within the last 3 months. The VA assumes if you can afford the higher monthly payment on the original mortgage, a refinance will only make things better. That’s why they don’t look at the value of your home. Even if you are upside down, you still have to pay your current mortgage payments. If refinancing lowers your payment, then it puts you and the VA in a better position.
The FHA Streamline Loan
The FHA offers a similar program for current FHA borrowers. They do not require a new appraisal or verification of a credit score, income, or assets. FHA borrowers can also be upside down on their loan and still refinance.
The FHA offers similar benefits as the VA. You can lower your interest rate, shorten your term, or refinance out of an ARM. The FHA just wants to make sure there is a net tangible benefit for the loan. This often means saving money every month. However, a shorter term or getting out of an ARM is often considered a benefit as well. They also want to make sure your payment doesn’t increase more than 20% if you shorten the term or refinance out of an ARM.
A unique aspect of the FHA streamline loan is the refund they provide. If you refinance your original FHA loan within 3 years of its origination, you may get a portion of the upfront mortgage insurance premium that you paid on your original loan back. It won’t be cash in your pocket, but the lender can apply it to your new FHA upfront MIP. This lowers the money you must bring to the closing.
Should You Refinance if Your Home Value Decreased?
A bigger question might be whether you should refinance if your home value decreased. Even if you are upside down, it can be a beneficial choice. You’ll need to figure out your break-even point to determine what is right.
Every loan, even streamline loans, charge closing costs. Unless you work a no-closing cost loan out with the lender, you’ll either pay the fees at the closing or wrap them into your loan. This increases the cost of refinancing. Before you can start repaying the savings, you must pay the closing costs off. That’s where the break-even point comes into play.
You must figure out how many months of savings it will take to pay off the closing costs. This is the point that you start reaping the savings. Let’s say your break-even point is in 3 years. If you know you’ll sell the home before then, refinancing won’t make much sense.
You can figure out your break-even point with the following calculation:
Refinance costs/monthly savings = months to break even
For example, if closing costs are $4,000 and you’ll save $75 a month refinancing, it would take 53 months or 4.5 years to break even.
If you’ll be in the home for at least that long, it makes sense to refinance. You’ll pay less interest over the life of the loan whether you lowered the interest rate or shortened the term.
If you have the need to refinance, there is a way. You just need to shop around and find the program that works for you. Don’t worry about your home’s value. Instead, focus on your payment history, credit score, and income consistency. These are factors that will affect your ability to refinance or not.