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Your Home's Worth Can Drive Your Refinance Decision

by Kristi  Shibata
Mortgage Directory Columnist

How much your home is worth is more than a mere figure on paper. Your home might be your greatest financial investment and asset. So when it comes to refinancing your mortgage, that figure is important in determining your refinance potential.

Before any new mortgage loan is approved, most lenders require an appraisal of your home. The appraised value is used to determine how much equity you own in your home. These days, mortgage application requirements have become stricter and in order to refinance, most homeowners will have at least 10% equity in their homes.

Getting an Appraisal for Your New Mortgage

An appraisal is a written estimate of the market value of your home. It serves as an unbiased analysis of your home performed by a professional licensed to appraise your type of property. Some determinants of a home's value include square footage, floor plan, school district, view, and most importantly, recent home sales in your neighborhood. Properties sold in your neighborhood are referred to as "comparables," or "comps."

The appraiser looks at the details of these sales, including price, seller concessions like paying closing costs, the length of time the home was on the market, and the ratio of properties listed to properties sold. Then, the appraiser takes the selling prices of your neighbor's homes and looks at your house in relation to theirs. For example, if the "comp" has a acre lot, but your house has a acre lot, the appraiser will adjust the value of your property upward. Conversely, if a neighboring home has a view of the ocean and you have a view of an alley, your value will be adjusted to reflect this difference in desirability.

The Refinance Number Game

Having enough equity to get approved for a mortgage refinance is not the only consideration. Anything less than 20% equity means the addition of mortgage insurance to your monthly payment. So if you aren't paying mortgage insurance now, but would be with a refinance, either due to a drop in home value or having to take a larger loan to cover cash out requirements or to finance your closing costs, you will be paying it with a new loan. Consider this cost when determining if the savings of refinancing will offset the additional costs. At least homeowners are now allowed to deduct their mortgage premium expenses as of the 2007 tax year.

Sources About the Author
Kristi Shibata is a public relations and communication specialist and regular Mortgage Directory columnist. She graduated from University of California, San Diego, with a BA in Communications.

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