Refinancing today is a lot more about asking, “can I…” rather than “should I…” This is primarily because of housing prices around the country, which have made it virtually impossible for homeowners to take advantage of today’s low rates. So, let me ask you again, do you know how much your home is worth?

Since housing prices maxed out in the summer, they have fallen about 3% across the country. Current reports say that they are going to drop even further before this summer. If you’ve been waiting in the refinance line for more than a month, you may want to have another look at this important stat. Otherwise, you may find that when you go to close, you’ll be surprised.

Having a professional appraisal done is definitely the most accurate way to keep track of your home’s value, but it is also the most expensive. Many online service providers will offer you a free estimate of your home’s value based on similar home prices in your area. These often come in the form of ranges to give you a basic idea. When home values are dropping like they are today, sticking to the lower end of these is a good idea.

So, how do I overcome low home values?

If your home value is getting in the way of a refinance, the only real options you have are a government loan modification or making extra payments until you can qualify. Both options will take time, and homeowners who are unable to refinance because of the low value in their home may have no choice but to wait. Luckily, once summer hits, home prices should see some improvement. When they do, you will have a narrow window to refinance. I would recommend making use of it.

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As we look back over the previous week, we see a continuation of steady rates and happy refinancers. Interest rates over the past week on the average 30-year fixed rate mortgage rose 2 points, still holding just below the 5% mark. On the other side, 15 -year fixed and 5/1 adjustable mortgages saw declines of 1 and 2 points respectively. Overall, everyone who closed this week got what they expected.

For those who started their refinance early to mid-December and are trying to close, now is a great time if you are able. The trouble I’ve been noticing some consumers are having is that they just can’t seem to get their loan closed fast enough. With that in mind let’s go over some tips that can help to ensure your refinance closes when you want it to:

-         Get Your HUD Statement: The RESPA (Real Estate Settlement Procedures Act) ensures that you get this statement before you close. Asking for it signals to a lender your readiness to close and also that you don’t want anything unexpected to crop up on closing day.

-         Give Yourself Time: Schedule your close for early in the day. That way, if something comes up, you time to deal with it.

-         Ask: Talk to your lender and inform them of your desire to close soon. Ask what, if anything, you still need to do. While you may think that you’ve done everything your loan officer will know best. Asking is the best way to find out.

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Last week I received an email from a concerned couple. I don’t know them personally, so without going into too much detail, here are the basics of their story:

They bought a home in 2006 for $270,000. They took out a $240,000 loan paying all the closing costs and a hefty down payment. At the time they purchased their home, they were in great shape. Since then a few things happened. One of them lost his job and the house lost its value. Currently they owe over $200,000 on a home that is worth just under $180,000. They are underwater. He is now working again, making less, but they are now just over a month behind on payments. Their question is, “Should we try to get a government loan modification or simply walk away from the home?”

The answers is modification first, foreclosure or short sale second, and a walk away third – or never if possible. The reason I’ve put these three actions in that order is because if you were to try to foreclose or walk away, the others become impossible. If you want to make sure you’ve tried everything before walking away, the plan is simple.

First, apply for HARP (Home Affordable Refinance Program). It’s the largest national program for underwater homeowners who are falling behind. Once you get in, a short term modification will be granted. After you’ve proven that you can handle the adjusted payments for a year or so, a permanent modification will take place and you should be able to return to your homeownership dreams.

(Remember: HARP isn’t the only program out there. Look at all state and federal programs that may apply to your situation. It may take time to fill out the paperwork, but the modification will pay dividends.)

If state or federal programs don’t work, your second option is a short sale or foreclosure. Both options will have a negative effect on your credit score, the short sale less so. Filing for a foreclosure because you cannot afford the home however, is not as bad as you might think. In as little as 2 years, you may find yourself back in the homeownership game.

The last and worst thing you can do is walk away. If you do it may be 7 years before you are able to get a home loan again. I don’t recommend walking away unless you have no other option.

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Homeowners are always writing me, asking about whether or not a refinance would be beneficial for their situation. Most of these consumers, however, only compare one mortgage (a 30-year fixed rate mortgage or FRM) to their current one. The truth is that while a 30-year FRM is basic and simple to compare with, homeowners who have been living in their home for 10 years or more will probably want to go with a shorter term.

Shorter Term = Big Savings

The reason that those who have lived in their home for at least 10 years should look for a shorter term is because of the equity they’ve already built in their home. By then, their loan is significantly reduced in size. Once this happens, a refinance to another 30-year FRM would mean a long wait and more interest payments. Taking a shorter term (such as a 15 or 20-year mortgage product) offers two things:

-         A fast track to homeownership, knocking off years to your homeownership plan.

-         Significantly lower interest rates than their current 30-year siblings.

A Quick Example

Let’s say you bought a home a few years ago for $400,000 and today you owe about $310,000. Your current interest rate is 5.5%. This would put your current monthly payments at $2,271.  If you were to refinance this mortgage down to 4.75% with a 30-year FRM, your monthly payment would decrease to $1,617. Sounds good right? A total monthly savings of $654 and overall interest savings of $37,118 if your keep the new loan for the full term.

Of course, if you were to go with a 20-year FRM, your interest rate would drop further to 4.4%. This means a monthly payment decrease of $330 to $1940 as well as an overall 20 year savings of $79,354. If you are looking to refinance and have owned your home for a while, make sure you shop short term for the best deal.

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Honestly addressing mortgage related issues is an attitude I’ve always tried to maintain. So, rather than talk one-sidedly on the topic of no-cost mortgages, I’ll let the facts tell the story:

1.      Higher Interest Rates

The interest rate of a no-cost mortgage is typically between 0.25 and 0.5% higher than comparable loans where fees are paid up front. Because you aren’t paying up front, there may be more fees required and your lender will have to pay them. The higher rate ensures that the lender gets the overall benefit from the transaction.

2.      No-Cost Mortgage Types

A no cost mortgage can come in a variety of types. Usually either the lender or third party fees are covered by the lender. In some cases both are covered by your lender and then added into your interest rate and/or overall loan balance. In almost all cases, the ‘no-cost’ reduction of cash up front is reflected in the loan itself.

3.      Who Benefits From No-Cost Refinancing?

Homeowners who are planning to sell or move within the next 5 years may want to think about this option as a way to lower your monthly payments while you make the transition. All others who have long term homeownership goals for their current home should save and look for a refinance with a much lower interest rate.

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In the latest report from the National Association of Realtors (NAR) last week, overall home sales through the last month of 2010 went up over 12%. Home sales figures like this haven’t been seen since the expiration of the home buyer tax credit over 7 months ago. The best part about the improvement in home sales is that it occurred without incentives like the tax credit and may tell us that more sales are yet to come.

One of the reasons for increasing home sales could be decreasing prices. Though small, a 1% decrease in median home prices nationally shows that sellers are doing everything they can to make the deal. Of course, this is not the news current homeowners want to hear, especially if they are thinking about refinancing.

Another good sign for the national housing economy in the NAR report was housing inventory. An overall drop in inventory of 4.2% shows some progress. Unfortunately, it’s going to take a lot more of the same to seriously impact many of the nation’s hardest hit areas.

Thoughts on what 2011 will hold for home sales by realtors and economists include both an increasing level of housing inventory as well as increasing home sales. The massive number of foreclosures yet to enter the market will definitely have an impact on housing inventory. Home sales, on the other hand, will be affected by economic factors like employment rates and consumer spending.

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As expected, mortgage rates have settled in near the 5% mark again this week. Overall, the biggest move in rates came on 30-year jumbo mortgages which dipped a mere 6 points. To go with the steady rates across the mortgage board, both refinance and purchase indices are up as well. Let’s have a look at how these steady rates affect you:

·        Buyers: Anyone looking to buy a home wants to know two things. Buyers want to know that they are getting what they paid for and that they are getting a fair deal on the money they borrow. When interest rates stabilize, it makes the second goal much easier to accomplish.

·        Sellers: Steady interest rates affect sellers in a couple of ways. If they are selling and planning to rebuy (which can be a long process overall), having fairly consistent rates makes it easier to predict exactly how much they need to sell for to buy their next home. If you are looking to sell and not buy another property, these rates should increase buying interest if your home is in good repair.

·        Mortgage Holders: Those with mortgages are already refinancing more these days as rates have kept pace with most predictions. Now is a great time for paying points, shortening your loan term, and reducing monthly payments.

It’s clear that trends in interest rates affect a lot of decisions in real estate. Knowing what’s going on in the mortgage market will usually lead consumers to asking the right questions about their personal mortgage situation. From my experience, if you ask the right questions, you’ll get the right answers.

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There is one problem that seems to come up again and again for refinance hopefuls. They must roll the appraisal dice and hope that they have as much equity in their home as they thought. If they don’t, refinancing gets a little tougher. Many homeowners see this as a sign that a refinance is just not in the cards right now. Unfortunately, low interest rates don’t wait for high home prices.

So, how do I capitalize on today’s rates with little home equity?

There are three easy steps that anyone looking to refinance with little home equity can use to maximize their ability and savings:

1.      Assess The Situation: The first thing any homeowner with less than 20% home equity should do is take a look at all their personal mortgage statistics. Get a look at what you owe, what you have saved, and what you are willing to spend to make your refinance happen. Sometimes homeowners who look over these stats will realize they aren’t ready to refinance. That is OK. You can still move to step 2.

 2.      Make a Plan: Once you’ve assessed your situation, you should be able to come up with a plan. For those that have little home equity, Private Mortgage Insurance (PMI) will likely be required. In cases where the homeowner has little or no home equity, government programs may be the only option. If you’ve properly assessed your situation, making a plan shouldn’t be too difficult. 

 3.      Take Action: Now that you know where you stand and have made a plan to make your refinance happen, don’t wait to start the process. Refinancing in today’s mortgage market is not a quick process by any stretch. Lenders are back up behind reams of paperwork and may not believe that your loan is a top priority right now. Starting the process as soon as you are ready is the only real way to make sure it happens as quickly as possible.

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For some, having two mortgages is a reality they just have to deal with. Whether it was to do home repairs, pay hospital bills, or send your child to college, the result is the same. You have two mortgages and a lot of interest to pay. As time goes on you may be ready to roll those two mortgages back into one. While most occurrences of rolling a first mortgage and home equity line or second mortgage back together will lower your interest, it may not actually save you money. The reason is because the term on your new mortgage will be reset. This could mean setting back your homeownership timeline by many years and could also mean an increase in total interest paid.

Homeownership Goals Matter

The problem is that many lenders will focus on the lower monthly payments, knowing that in the long run, you will pay more. Of course, you may not be as worried about your homeownership timeline as you are with saving some cash monthly. Those who find themselves in this situation will have to make a hard choice now and should hope to refinance again in the future.

An Important Tip

Always get a quote from a loan servicer for the first mortgage loan amount only, not both. Then get a quote for the amount of the second loan. Remember that when applying for a refinance quote on a second mortgage, you will need to cite the balance of the first.

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One of the hurdles that many homeowners are coming across these days is a discrepancy in their home’s appraised value. This is a big deal if you are in the wrong situation. If you are a part owner of a home who wants to sell your share or are in the midst of a divorce, establishing fair market value can be exceedingly important. While these incongruences are troublesome, you don’t have to let them bother you. Here’s how:

1.      Get Realistic: I’ve noticed that almost all home appraisal issues have some element of unrealism to them. One party, or both, believes that the home is worth much more or less than it actually is. This information may come from the city, personal research, or an appraisal which is favorable to this individual’s situation. Bring a realistic approach to determining fair market value for your home and it will get a lot easier.

2.      City Appraisals are Outdated: Simply put, don’t trust the appraisal of your city or county as the authority on your home’s actual value. These appraisals are usually outdated and always based on less than current information. The truth is that cities don’t want to change their taxes charged that often so they only do appraisals once or twice a year. This means that in almost every case you cannot trust these appraisals.

3.      Hire Your Own Professional: The only full proof way to ensure that you get a fair estimate of your home’s value is to entrust the appraisal to someone you hire personally. Even if another party has already done so, having more than one appraisal can never hurt. In the case of a divorce, there are appraisers who are able to complete a ‘divorce appraisal’ which is admissible in court. The down side to this option is the extra cost involved, but if it means saving money in the long run, it makes sense to do it right.

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