How to Adjust Your Mortgage to the New Value of Your Home
Real estate values adjust up and down regularly in response to market changes. Though a home's value rarely spikes or plummets suddenly, it can happen. Adjusting your mortgage to reflect your home's true value is a beneficial way to ensure that you are not in over your head if your home value drops. If your home increases in value, refinancing your mortgage to reflect the new value will put cash in your hand.
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Things You'll Need
- Appraisal
- Mortgage lender
- Cash (potentially, if your current mortgage is more than what your house is worth)
Instructions
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Get an appraisal. A professional real estate appraiser should carry out this process. The appraiser will come into your home and take measurements and notes regarding the condition of your home. She may even ask questions about upgrades or remodels you have performed. All of this information, combined with the average sales price of homes comparable to yours, will determine what your house is worth on the market. The appraiser will contact you and let you know what your house is currently worth and send you a copy of the appraisal.
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Assess the newly appraised value of the home against the balance of your current mortgage. If the new value is higher than the balance you currently owe on your mortgage, you may want to consider refinancing. If the new value of your home is considerably lower than what you currently owe, you will definitely want to attempt to refinance your mortgage.
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If the appraisal warrants it, apply for a cash out refinance. If the value of the home has increased significantly you can obtain a new mortgage loan based on the new value of your home. With cash-out refinancing, the proceeds from the new loan pays off your existing mortgage and anything left over is forwarded to you. If you have other, high-interest debt, it makes sense to refinance your home and use the cash you obtain at the lower interest rate to pay off these expensive debts. These debts include credit cards, car loans and any personal loans you may have taken out. Any fees that might be assessed in a refinance can usually be rolled into the loan as long as the total balance remains under a specific loan-to-value ratio.
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If your home's value has decreased significantly and you owe more than the house is worth, you are considered to be upside down in your loan. This is a dangerous place to be, considering that you won't be able to sell the house if the need arises, and foreclosure may be imminent if you lose your job or your adjustable rate mortgage increases. If this is your situation, you should apply to refinance with negative equity.
Refinancing a home that is worth less than your existing mortgage loan is tricky. You will need to pay the difference between the current mortgage and the refinanced balance out of pocket to obtain a traditional fixed-rate mortgage. If doing this is not a possibility, you can seek aid under the HARP program (Home Affordable Refinance Program). The HARP program allows homeowners to refinance their homes at 125 percent of its value to reduce the strain of overinflated mortgage payments that result from rising interest rates. While you will still be "upside down" in your loan for a while, having a fixed-rate mortgage means that you can be sure your monthly payments won't fluctuate.
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Tips & Warnings
You should always try to keep at least 20 percent equity in your house to hedge against home value declines, even if you could use that money to pay off other debt.
It is never a wise decision to take money out of your home to finance nonessentials.
