Equity: Then Vs. Now

2013-11-23T00:00:00Z Equity: Then Vs. NowPeter G. Miller nwitimes.com
November 23, 2013 12:00 am  • 

QUESTION:

We purchased our home for $745,000 in 2007. In July 2012 we paid in additional money, brought the loan down to $315,000 and refinanced. We were told that we had to pay for private mortgage insurance because the loan-to-value ratio was not at 75 percent.

Fannie Mae said that the monthly insurance fee did not apply, since we had more than 20 percent equity. Our lender will agree only if we get another appraisal to show we have the required equity. But based on the original purchase price, we have put much more than 20 percent into our house. This seems unfair.

ANSWER:

Lenders want borrowers to have either 20 percent down when buying or at least 20 percent equity when refinancing. Those with less cash or equity are required to get backing from a strong third-party insurer such the FHA, VA or a private mortgage insurance company.

There are several issues here:

First, with a refinance, how do we measure equity? Is it the appraised value of the property or the appraised value less marketing costs? There’s a difference.

Second, the original purchase price doesn’t count, unfortunately for you. The property is security for the loan and the lender has to consider the value of the property in today’s market. Past values may have been higher or lower, but the essential question for the lender is what can be gotten from the property today if the borrower doesn’t pay and the home must be foreclosed.

Third, with a “portfolio” loan – financing a lender keeps – the general rules may not apply. A lender could offer financing but on conditions which differ from conforming loans, including a requirement to have private mortgage insurance even with 20 percent down.

If the loan is sufficiently attractive, it could still be a good deal.

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