Do you have enough equity to refinance? Here's how to tell
If you鈥檝e been underwater on your mortgage 鈥� owing more than the market value of your house 鈥� or live in an area where home values are struggling to recover after the recession, it can be hard to know whether you鈥檝e regained enough equity to make a mortgage refinance work in your favor.
鈥淓quity鈥� is just a fancy term to describe the difference between your home鈥檚 fair market value and the outstanding balance of your mortgage. If the market value is higher than what you owe, you have equity 鈥� and you might be well positioned to . In some markets, homeowners have been enjoying double-digit price appreciation as property values climb.
Others haven鈥檛 been so lucky and have 鈥渘egative equity.鈥� Six million U.S. homeowners are currently underwater on their mortgages, a grim reminder of the 2007-08 financial crisis. As many as 820,000 of those borrowers owe 20% or more than what their homes are currently worth, according to the most recent Zillow Negative Equity Report.
Don鈥檛 panic if you鈥檙e still underwater, though; you can take steps to refinance and improve your financial situation. And even if you鈥檝e been turned down in the past, you might qualify this time. Homeowners have several ways to learn where they stand on equity.
Check online portals
To get a general idea of your home鈥檚 value, you can check online real estate portals for an automated estimate of your home鈥檚 value,聽such as聽Zillow鈥檚 Zestimate.
These type of estimates give you a sense of your home鈥檚 worth based on comparable sales and listings on the market, but an online estimate is not always perfectly accurate, says Joe Parsons, senior loan officer with PFS Funding in Dublin, California.
Also, pay attention to what homes in your area have sold for recently. If you see open houses nearby, take a few minutes to walk through those properties to聽see how your home stacks up against what鈥檚 on the market and better understand why sellers are asking certain prices.
Ask a real estate agent or lender for an expert valuation
The second way to find your home鈥檚 value is to consult with a real estate agent who鈥檚 active in your neighborhood. Real estate agents can provide a comparative market analysis, which looks at recently sold listings and comparable homes now on the market. A CMA allows you to measure your home鈥檚 value based on size, condition, amenities and other key attributes. Most agents will provide a CMA upon request at no charge.
Another low-cost route is to ask a potential refinance lender for an automated valuation model report, Parsons says. An AVM is far more reliable than an online estimate, which typically has little or no context. Most (if not all) lenders produce AVM reports, which cost about $20.
These reports pull the same data as a home appraiser would, but they cost a fraction of what an appraisal does. Property appraisals are the most accurate and thorough way to find out what your home is really worth, but because they cost about $500 on average, you don鈥檛 want to pay for one unless you鈥檙e serious about following through with a refinance.
Positive equity? You can move forward with a refinance
If you鈥檙e fairly confident you have a good read on your home鈥檚 value and it鈥檚 worth more than you currently owe on your mortgage, find a to help you get the refinance process started.
First, your lender will order a property appraisal from a professional real estate appraiser, who will thoroughly inspect your home inside and out. The appraiser will look at your home鈥檚 size, condition, location, improvements and defects, as well as recently sold listings and current homes on the market, to come up with an official value for your home. (Tip: You can help your home鈥檚 appraisal value by doing a few .)
The key is to get the ball rolling now while rates are still low and you have positive equity, says Matt DeCesaro, branch manager of HomeBridge Financial Services in Johns Creek, Georgia.
鈥淭here are a lot of people sitting on the sidelines because they just don鈥檛 know their options,鈥� DeCesaro says. 鈥淪itting down with a mortgage professional for an hour or two could be a big game-changer.鈥�
If you鈥檙e underwater, there鈥檚 help
Let鈥檚 say an online estimate and an AVM report find your home is worth less than you owe on it. Chances are an appraisal will reflect similar results. If you鈥檙e struggling with payments and you can鈥檛 refinance because you have negative equity, there are options to take some of the burden off your shoulders.
Two government programs 鈥� the Home Affordable Refinance Program and Home Affordable Modification Program, also known as 聽鈥� are meant to help homeowners who might be in danger of losing their homes. Both expire at the end of 2016, so you鈥檒l have to hustle if you want to take advantage of them, DeCesaro says.
Deborah Kearns is a staff writer at NerdWallet, a personal finance website. Email: dkearns@nerdwallet.com. Twitter: . This article first appeared at .
