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Bob Said:

housing prices and refinancing?

We Answered:

When taking out a mortgage for either a refinance or a new purchase, one of the most important points to a lender is the loan-to-value ratio (LTV). The higher the LTV, the higher the risk. As a property goes down in value, if the mortgage amount does not go down, then the LTV increases, thus increasing risk. Take this example...

If you purchased a home for $200,000 with an 80% LTV, this would mean your mortgage was for $160,000.

$200,000 X 80% = $160,000

The other 20% is your "down payment." This becomes known as your home's equity.

People refinance for a variety of reasons. Most people refinance to take money out of thier property. If you want to take out $40,000, you would need to refinance to a new mortgage for $200,000

$160,000 + $40,000 = $200,000

In a rising market, this is not a big deal. If the property went up in value by 25%, the property would now have a value of $250,000.

$200,000 + 25% = $250,000

To refinance to a new mortgage at 80% LTV, this would not be a problem and would give you your new mortgage for $200,000.

$250,000 x 80% = $200,000

After paying off your old mortgage for $160,000 you'd have your check for $40,000.

What happens if instead of going up 25%, your house goes down in value by 25%?

$200,000 - 25% = $150,000

Guess what? You now owe more money on your house than it's worth. If you are trying to refinance to take money out, it eould no longer be possible.

As I said earlier, people refinance for a number of reasons. Someone may want to reduce thier mortgage payment, so instead of trying to take cash out, they may want to put cash into the house. As long as the new mortgage has the right LTV ratio to match the lender's requirements, there would never be a problem.

In summary, it's all about LTV. If house prices go down, maintaining your LTV is harder. Most refinances happen because people are taking money out. Therefore, in a deflating market, it's more difficult to refinance.

Vivian Said:

housing prices and refinancing?

We Answered:

This is not a direct effect of value loss but a loss in equity or better known as Loan to Value (LTV). Guidelines are set to allow borrowers to qualify for particular LTVs based on their credit scores. The way you figure LTV is Loan Amount / value of home. So in reality your loan is not effected by the direct drop in value but the fact that your LTV is so much higher.

If you need more info let me know Eddie.k@gwhloans.com