Home Refinance question

[rhollin]

Arizona


My wife and I purchased our home in July of 03, moved in Dec 03. I'd like to start a company and would like to take some cash out of the house to do so. I've called around to the different mortgage companies, but I think I'm just being told what they think I want to hear. I'd like to get some honest opinions from anyone that knows the industry and maybe what may be best for us. We are in a new community and our home went for $116,000 base price when we bought it. Now the exact same home is going for $150,000 base price. We put $23,000 in upgrades and about $5,000 in home improvements including landscaping the backyard (which wasn't included). My assumptions are that the house is worth around $165,000. I'd like to take out $20,000 to start my business. The current interest on the house is 7.25% which we are getting killed with and we are paying PMI which we would like to rid as well. My wife’s credit is currently at 708 so we will be using her credit to refinance. If I left anything out please let me know. If you have any advice please help.

Thanks

 

[Ciarraine]

Arizona


My wife and I purchased our home in July of 03, moved in Dec 03. I'd like to start a company and would like to take some cash out of the house to do so. I've called around to the different mortgage companies, but I think I'm just being told what they think I want to hear. I'd like to get some honest opinions from anyone that knows the industry and maybe what may be best for us. We are in a new community and our home went for $116,000 base price when we bought it. Now the exact same home is going for $150,000 base price. We put $23,000 in upgrades and about $5,000 in home improvements including landscaping the backyard (which wasn't included). My assumptions are that the house is worth around $165,000. I'd like to take out $20,000 to start my business. The current interest on the house is 7.25% which we are getting killed with and we are paying PMI which we would like to rid as well. My wife’s credit is currently at 708 so we will be using her credit to refinance. If I left anything out please let me know. If you have any advice please help.

Thanks

The appraisal is going to use for comparables the actual selling price of houses in your neighbourhood and making adjustments for the improvements. Unless there's some recent sales in the ballpark of $165,000, it may take some work to get to that number.

What have things really sold for? No underwriter wants to look at a 150,000 comp and see $15,000 in adjustments on a house that looks very similar.

As far as your rate--crunch the numbers with someone competent. 80/15/5's often save money over single mortgages with MI, because the MI payment isn't tax deductible but the second mortgage interest is.

 

[rhollin]

I'm not sure what homes are selling for here as 100% of them are new within the last year and a half. I do know that this exact house is selling for $150,000 brand new. I would imagine if you take that figure and add the upgrades that we had done to the house and the improvements we've made you should be able to come up with a reasonable estimate.

 

[Ciarraine]

I'm not sure what homes are selling for here as 100% of them are new within the last year and a half. I do know that this exact house is selling for $150,000 brand new. I would imagine if you take that figure and add the upgrades that we had done to the house and the improvements we've made you should be able to come up with a reasonable estimate.

That's not how appraisals work. Like I said, no one's going to want to approve and appraisal that adjusts two houses that look exactly the same, on a similar lot, by 10% without a lot of very good reasons.

In other words, your upgrades don't mean much if you can't demonstrate that they're adding resale value to your house.

Just because you put a $2000 stereo in a rusty van does not mean that the van is worth $2000 more now.

 

[rhollin]

That's not how appraisals work. Like I said, no one's going to want to approve and appraisal that adjusts two houses that look exactly the same, on a similar lot, by 10% without a lot of very good reasons.

In other words, your upgrades don't mean much if you can't demonstrate that they're adding resale value to your house.

Just because you put a $2000 stereo in a rusty van does not mean that the van is worth $2000 more now.

Maybe you do not understand me. The upgrades we did are significant upgrades, (i.e. adding a 3rd bathroom, adding a back porch). These are not little upgrades like putting curtains on the windows. These upgrades will most definitly add value. Maybe you are missing the point when I say the base price of our home brand new was $116,000 and now the base price of the exact same home (and I mean exact, everything) is now $150,000. What part of that am I not conveying correctly?

 

[FloridaRob]

The bathroom is significant and will be adjusted upwards. but as Ciarrane said, a lender will want the comps to be reflective of other homes in the area. They will usually want the appraisal to bracket the value. By that I mean, one that sold below the $165,000, one around the $165,000, and one above the $165,000. If all the sales are adjusted upwards or downwards get ready for major undewriting problems. Since your house is new and there are several other new home sales, an underwriter is not going to let the appraiser go far down the road to get another comp. The underwriter will not want all builder sales either so the appraiser may be required to go into another competing subdivision if it is similar.

Adjustment for Baths or larger porches can be explained without much difficulty by the appraiser. And don't look for dollar for dollar return on your upgrades. If you put $10,000 worth of landscaping in, you will be lucky to get 1/5 of that back in an appraisal.

To get rid of the PMI your loan value to market value will have to be less than 80%. So if your market value is $165,000, you can not borrow more than $132,000.

 

[Ciarraine]

To get rid of the PMI your loan value to market value will have to be less than 80%. So if your market value is $165,000, you can not borrow more than $132,000.

Thanks FloridaRob, you made the point much more clearly than I could.

Just want to point out that in the Northeast at least, loans with MI are increasingly rare. A lot of lenders now divide the risk into two loans, a first mortgage for 80% and a second mortgage for the balance, up to and even beyond the remaining 20%. Calculating a blended rate and remembering that MI is not tax-advantaged can often achieve a significant savings over loan with MI.

By the way, it's "MI" on conventional loans, and "MIP" on FHA Loans. PMI is the name of a particular mortgage insuror.

Hey, wish me luck guys, I'm taking my PA Title Insurance Producer exam tomorrow.