Can I Refinance if My Home's Value Has Decreased?

Poor economic conditions contribute to challenges with diminishing home values.

Poor economic conditions contribute to challenges with diminishing home values.

When you apply to refinance your home mortgage, the lender reviews your financial situation just as with the first loan. A lower home value definitely impedes your ability to refinance, but it doesn't completely ruin your chances because price is only one refinance consideration.

Refinancing Benefits

People refinance for a few key reasons. A common motive is simply lowering your mortgage interest rate. If you can drop from 6 to 4.5 percent interest, for instance, you could save thousands and thousands of dollars over the life of your loan. Reducing monthly payments is another common motive. However, a restrictive income and a falling home price are problematic when it comes to getting a new loan.

The Equity Picture

The new lender looks closely at the amount of equity you have in your home when you want to refinance. On conventional loans, lenders typically expect you to have at least 5 to 10 percent equity, according to legal website Nolo. Thus, if your home price has dropped from $300,000 to $270,000, you would potentially need at least $27,000 in equity at the point of refinance. In other words, you couldn't owe more than $243,000 on the current loan.

Loan-to-Value Ratio

The comparison of your current mortgage balance to the property's appraised value is called loan-to-value ratio. Lenders commonly require that you pay for an appraisal as part of a refinance. Both mortgages and second home loans, such as equity loans and lines of credit, are factored in. Thus, if you have a $230,000 mortgage balance and a $28,000 balance on a second mortgage, you are likely out of luck with a home value of $270,000.

Debt-to-Income Factor

If you have the right amount of equity, you can certainly refinance with a decreased property value. However, loan-to-value isn't the only factor weighed into a refinance decision. Similar to the original mortgage, the lender evaluates your credit report, your income and debt obligations. You need a debt-to-income ratio in line with the lender's guidelines. Conventional lenders look for a 28 percent or lower mortgage-to-income and a 36 percent or lower debt-to-income ratio. If your income has gone up, you haven't taken on substantial new debts and the proposed new mortgage payment is lower, you should fare well on this factor.

 

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