Home appraisal came in super low, worth it to pay down?

[Dr. Gaius Baltar]

2 years ago, I refinanced my home from 5.25% to 4.25%, and the appraisal came it at $490,000.
6 months ago, I refinanced from 4.25% to 3.75% with Amerisave, and the appraisal came in at $493,000.
Since 6 months ago, I've done $10,000 worth of improvements to the house, and I provided a list to the appraiser.
Today, I received notification from Amerisave, who I'm refinancing with again to 3.25%, that the appraisal came in at $425,000. I'm shocked and confused. This appraiser just said that my house fell 16% in 6 months. (Zillow says that it's increased in value by $30,000 in the last 6 months).

I'm told by Amerisave that my options are:

1) Proceed with the refinance, but pay ~$153.62/month in mortgage insurance premiums due to the LTV being so high now. I haven't been paying mortgage insurance before.
2) Lower my mortgage to $340,000, which would require paying down the mortgage by $36,000 immediately.
3) Cancel the loan and pay for the appraisal and credit report only (about $465).

Current mortgage at 3.75% is $1,752/month. With 3.25% it would be $1,637 with no mortgage insurance premiums at the current loan balance ($376,208), or $1,479.70 with no mortgage insurance premiums at $340,000.
I am maxing out my 457 and Roth IRA contributions.

If I proceed with option 2, it would be with money withdrawn from my taxable account that would otherwise have been invested in a 27/73 stock/bond fund portfolio.

I intend to keep this house until 2016 or 2018 before moving.

Does anyone think that Option 2 is worthwhile?

[stan1]

If your desired asset allocation is really 27% stock / 73% bonds I'd pay off (down) the mortgage.
I wouldn't be borrowing money to invest in a taxable account if I had a very conservative asset allocation.

That asset allocation means: I have no need to take risk (large portfolio already); I'm close to retirement (and wouldn't want a mortgage in retirement); or very risk adverse (and therefore wouldn't want a mortgage hanging over my head).

[ShowMeTheER]

Yes, I'd say it's still worthwhile.

However, depending on the expected ease of sale in 5 years, if that is your known time horizon then I'd ask why you aren't going to a 5/1 ARM or so and save another 60-75 basis points for each of the next 5 years.

[Dr. Gaius Baltar]

ShowMeTheER:
The plan is to move in 2016-18, however something could happen that might change that plan, and I think it's best to keep my options open. Also, Amerisave doesn't seem to offer competitive rates on 5/1 ARMs. In order to meet the closing costs (maybe about $3,000) and get a no-cost refinance, I'd have to go up to a 3.5% 5/1 ARM, in which case I'd actually be paying more per month.

[mikep]

Amerisave didn't tell you about option 4) which is you could proceed with option 1) to sign the paperwork then cancel the loan in the 3 day rescission period - then they eat the $465 cost as if you did option 3 and not you.

Not saying this is the best option, just that its another option they didn't tell you (and for good reason).

http://www.mtgprofessor.com/a%20-%20ref ... inance.htm

the best of those options is #2 if you can easily pay down another 36k given the high amount that would have gone into bonds anyway.

For ARM's I'd suggest the no cost Penfed 5/5 ARM (2.75%). Maybe rescind/cancel the deal and go with Penfed?

[tfb]

Does anyone think that Option 2 is worthwhile?

Yes, absolutely. The return on the $36,000 is very high. First you pay 3.25% less in interest on the $36k. Second you save the $1,800/year PMI. It's a 8% return right there. It wasn't Amerisave's fault the appraisal came in low. So I wouldn't punish Amerisave for it with the rescission.

[Dr. Gaius Baltar]

Does anybody else think that there's something fishy going on with the appraisal value? How can our home have lost 16% of its value compared to 6 months ago? The appraisal company is even the same.

Is it possible that Amerisave is manipulating the appraisal value in order to retain me as their customer on the current 3.75% mortgage? Could they be ordering the appraiser to appraise the home for $425,000? In the past, I've had bad experiences with lenders changing appraisal values in order to either keep me in their current mortgage, or prevent me from going somewhere else. When I had a mortgage with Bank of America, I tried to get them to refinance me to a lower rate than 5.25%, and they insisted over the phone that the appraisal would come out to only $350,000. When an appraiser selected by Bank of America came to appraise the property for a prospective refinance, lo and behold, they appraised it for $350,000. When I then went with US Bank to refinance to 4.25%, their appraiser appraised it for $490,000.

Do lenders give you high appraisals to gain you as a customer, and then low appraisals if you want to refinance with them, in order to restrict you from doing so?

[jahol000]

Amerisave seeks to sell its loans within hours/days after closing. It never/rarely holds them for its own account. Highly unlikely it is lowballing the appraisal to keep you in the current mortgage. I would see if there is an appeal process on the appraisal. Seems you've got a good argument it's off the mark.

[FoolStreet]

Same thing happened to me but my loan was much higher so I went to another lender who appraised it correctly. In my case I had to. In your case you can just go with the flow and pay the extra now.

It's like getting a speeding ticket when you really weren't speeding. You could fight it but who is the judge, or lender in this case, going to believe?

[tfb]

Does anybody else think that there's something fishy going on with the appraisal value? How can our home have lost 16% of its value compared to 6 months ago? The appraisal company is even the same.

New laws passed since the financial crisis has put enough barrier between the lender and the appraiser. The new found independence has given appraisers practically the freedom to appraise it to any value. The appraisal company does not set the appraised value. The individual appraiser does. An appraisal is an opinion anyway. It's very hard to argue about opinions.

[travelnut11]

Do you have a copy of the appraisal? I just refinanced and was surprised when my appraisal came back significantly less than the appraisal I had done 18 months ago. Particularly given that I live in an area with stable prices. It ended up not mattering because I had enough equity to get the deal done but when I did get a copy of the appraisal at closing I discovered the appraiser only gave me credit for 2 bed/1 bath when my house is actually 3 bed/2 bath. The 1 bed/1 bath in question are partially below grade but with legal egress windows so they should've been included when doing the comps. I wonder if something similar happened with your appraisal. Can you see it before the closing to dispute the values?

[madbrain]

Try to appeal the appraised value. It may or may not help, though. I have not had any luck before. Appraisals can really came in all over the place. I did a refi in January and the appraisal came in at $830k. In September I did another refi, and the appraisal came in at $950k. That's a 14% difference. The market did go up in between, but not nearly that much. The first appraiser lowballed, IMO, second appraiser was about right.

If the appraisal appeal fails, and you think this is just one rogue appraiser, it may make sense to pay the $465 and start the refi process over with another lender, who will reappraise it, perhaps at a more accurate value. Zillow cannot be trusted for individual home values, however it is useful to look at the trends in your area, as those tend to be accurate. If the trend has been up, then you may be more likely to get a better value with someone else. Of course, it is the end of the year now and sales tend to slow down during the holidays in most areas, which means reduced appraisals.

Do the math - the current safe bank return around 1% on $36,000 is only about $360, so it would take you 15.5 months to recoup the loss of the $465 fee, even longer if you account for taxes.
Of course if the $36,000 are currently invested in something riskier/higher-return, the math may work out differently.

[Dr. Gaius Baltar]

It sounds like I should appeal the appraisal then, yeah. Travelnut11, I have a copy of today's appraisal, May's appraisal, late 2010's appraisal, and 2 older appraisals. The difference between today's appraisal and May's appraisal is that the appraiser had lower comparables on his appraisal report.

I actually feel more secure having the $36,000 in taxable rather than using it to pay down the mortgage, where it would be more difficult to access if something goes wrong and I need it, although I deem that very unlikely.

The appeal probably will not work, and I'll probably have to try again with a new lender. I want to go with another 30-year fixed mortgage with no closing costs (aside from escrow and interest), because with a 5/5 ARM, there might be some extenuating circumstances that cause me to delay my departure date past 2016-18. With Amerisave, the good thing about them was that you know where you stand on the closing costs, and can set it up to get a loan that genuinely has no closing costs, due to the credit that they provide. From looking at PenFed's site, it doesn't seem that they offer that with their 30 year mortgages, although they do with the 5/5 ARM. Does anyone know another good place to find a no-closing cost 30 year fixed refinance at a competitive rate?

At National Mortgage Alliance, I would have to go up to 3.5% to get a no-cost refi.
Aimloan looks good. 3.25% no-cost. Aimloan also has a 7/1 ARM @ 2.625% with no costs other than escrow and interest. That's good because I'll definitely be out of here by 01/2020. Actually, that's so good that I should probably go ahead and cancel the Amerisave.

[Watty]

...
I intend to keep this house until 2016 or 2018 before moving.....I'll definitely be out of here by 01/2020.......

Since your money will not be tied up all that long then any extra money you put into the house would be like getting a CD at the same interest rate as your loan. I would be tempted to pay a lot extra if you and then save the money each month that the mortage payment is reduced by.

[jcb3030]

It's anecdotal, but Amerisave gave me a very low appraisal as well.

See viewtopic.php?f=2&t=98427

[Dr. Gaius Baltar]

Did you go with another lender and get a better appraisal?

[jcb3030]

No, right after losing $400 on the appraisal fee I didn't want to risk it again.

Recently I have been giving some thought to trying a new lender. The whole process feels like rolling the dice. Very frustrating.

[madbrain]

I don't think it matters who the lender is. For the 2 widely different appraisals I did earlier this year, I was using the same lender, First IB.

If you are not comfortable paying the mortgage down, then it sounds like you just have to pay the appraisal fee and try again later.

[wearymicrobe]

No, right after losing $400 on the appraisal fee I didn't want to risk it again.

Recently I have been giving some thought to trying a new lender. The whole process feels like rolling the dice. Very frustrating.

I was in the same boat but with B of A. My 669-689K house by realtor and non solicited offers was appraised at 332K. It was laughable, I tried an appeal process with absolutely no response. A house 1/3 the size on 1/5th the lot with no improvements three houses down had just sold above 450K. Unless they are taking a slice of the appraisal fee I have no idea how they are making money.

Went to a local credit union and appraisal fell right in line with the proper valuation 677K. I just sucked it up and ate the appraisal fee on the first loan, it will be paid back in two months of reduced costs due to the rate reduction.

[Dr. Gaius Baltar]

That's Bank of America alright. Did you already have a loan with them and were you trying to refi?

Recently I have been giving some thought to trying a new lender. The whole process feels like rolling the dice. Very frustrating.

I hear you. There's absolutely no rhyme or reason to these appraisals, which is what makes it so nerve-wracking. You get the wrong appraiser, and your house loses half its value? My god!

[vveat]

Can you benefit from the low appraisal by using it to reduce your property taxes? That's what we did in a similar situation earlier this year. First I was very angry about the low value, even though we had enough equity that it didn't hurt us with the loan, I just thought the appraiser did a quick and sloppy job. But then it started me thinking about taxes and we got some lemonade out of this lemon at the rate of $1k less annually.
Not solving your immediate problem with the loan (I would go for option 2 as well), just an extra thought.

[Dr. Gaius Baltar]

Sadly (happily?) my property taxes assess the house even lower than the lowball appraisal.

[DiscoBunny1979]

Can you benefit from the low appraisal by using it to reduce your property taxes? That's what we did in a similar situation earlier this year. First I was very angry about the low value, even though we had enough equity that it didn't hurt us with the loan, I just thought the appraiser did a quick and sloppy job. But then it started me thinking about taxes and we got some lemonade out of this lemon at the rate of $1k less annually.
Not solving your immediate problem with the loan (I would go for option 2 as well), just an extra thought.

----------
I'd be very careful about using an 'appraisal' to justifiy anything. For instance, would you use an 'appraisal' to choose what level of insurance you need to protect your house in case of fire (i.e. rebuilding costs)? I don't think so. Appraisal value and rebullding costs are two different things. The same with using an appraisal to justify a lower assessment. Unless the county has actually assessed the property lower, I wouldn't volunteer this information because it would essentially be admitting that the appraisal is 'correct' and you agree that your house is not worth what you think it is. It's not likely that someone will want to pay a higher price on your house when you admitted just 6 months ago or a year ago that it's not worth what you want.

[talldave]

I closed my Los Angeles home sale last month. The appraisal we got was also low, and almost killed the deal. Check out this recent news article regarding this appraisal trend
http://www.ocregister.com/articles/appr ... sales.html

In my situation, I listed at $420, got 3 offers in first week, accepted one at $415. Appraisal came in -$20,000 at $395. Buyer didn't know what they might do. I re-offered $410 and they provided $15,000 to make up difference. Their lender wouldn't budge from the appraised value. The deal almost died. Escrow took 60 days because of this.

[Mudpuppy]

Sadly (happily?) my property taxes assess the house even lower than the lowball appraisal.

Is it possible that was a factor in the appraisal? Since property taxes are usually based on sales that have occurred during the prior year, perhaps the comps this appraiser chose were more generic and similar to the generic sales that are used for property tax assessments. You really need to inspect the report to see if there was an error (as previously indicated) or if the comps used were too generic to actually be comparable to your property. If this has happened, a second appraisal might end up higher.

[Dr. Gaius Baltar]

Yes, Mudpuppy, I think that might have been a factor in the appraisal. Also, there have not been any home sales in my neighborhood for a while. In 2010 there were some home sales at around 500k, then in December 2011 / January 2012 one sold for 455k and another for 395k (which was likely a foreclosure). So it seems that things are tapering off in my immediate neighborhood. And in July my property tax assessment was reduced by $50,000.

I'm trying to determine my rate of return on refinancing if I have to pay down the mortgage to get the refinance. Can someone confirm if I have my math correct?

Yearly Mortgage Payment Savings / Amount of money I have to reduce the mortgage to get these savings = rate of return

So if in order to get a 2.625% 7/1 ARM with a monthly savings of $386.39 (yearly $4636.68) I have to reduce the mortgage by $36,000, then my rate of return is 4636.68 / 36000 = 12.9%/year. Is that correct?

[tfb]

So if in order to get a 2.625% 7/1 ARM with a monthly savings of $386.39 (yearly $4636.68) I have to reduce the mortgage by $36,000, then my rate of return is 4636.68 / 36000 = 12.9%/year. Is that correct?

Not exactly correct but close enough.

[johnny72]

I had appraisals within a week of each other swing by $80,000. It totally depends on the appraiser.

Zillow's data is crap under the best of conditions.

[Dr. Gaius Baltar]

What is the correct way of determining this return on investment? I can see two ways, one very optimistic, one less optimistic.

The more optimistic appraisal of the situation is that if reducing the mortgage by $36,000 and refinancing to 2.625% results in a return of 12.9%/year, then reducing the mortgage by $46,000 and refinancing to 2.625% is also very beneficial because it results in a return of approximately 11.13%/year (5118.6 / 46000 = 11.13%). In such a case, I would be a fool to not reduce the mortgage as low as possible when refinancing, even though reducing the mortgage more results in marginally lower return on investment, because it's impossible to find an investment with a guaranteed return of 11%.

The less optimistic appraisal of the situation is that it's the refinance to 2.625% itself that carries an infinite return on investment, and any further reduction in the loan balance carries only a marginal rate of 2.625% in yearly RoI. In which case, the logical course of action would be to reduce the mortgage balance to simply the amount required to refinance at the new low rate, and with remaining funds, either invest them (if I believe the return over the next 4-8 years will be excess of 2.625%), or pay down the mortgage further for a guaranteed return of 2.625%.

[pteam]

Use that low appraisal to get your property taxes reduced!

[Dr. Gaius Baltar]

No, the lowball appraisal is higher than my property tax assessment.

[tfb]

What is the correct way of determining this return on investment?

Because you can bring down the rate with PMI, you can't attribute the rate reduction all to paying down principal. Your return on paying down principal is PMI + interest on the principal paid. See my post earlier in this thread.

[Mudpuppy]

I'm trying to determine my rate of return on refinancing if I have to pay down the mortgage to get the refinance. Can someone confirm if I have my math correct?

Yearly Mortgage Payment Savings / Amount of money I have to reduce the mortgage to get these savings = rate of return

So if in order to get a 2.625% 7/1 ARM with a monthly savings of $386.39 (yearly $4636.68) I have to reduce the mortgage by $36,000, then my rate of return is 4636.68 / 36000 = 12.9%/year. Is that correct?

That would be for the first compounding period. You're missing the effect compounding would have on the $36,000 if left in investments for the considered time period. This leads to an overestimated rate of return.

What you want to calculate is when would the interest earned over the time period be greater than or equal to the savings on the mortgage over that same time period. To calculate the interest earned, you need a compounding interest formula (and usually these formulas calculate the TOTAL principal after the time period, so don't forget to subtract the original principal to get the interest earned). Then you'll set up an equivalency equation and solve for the rate. You'll likely need a calculator that is capable of calculating exponents/roots other than squared or cubed.

And keep in mind that most compounding interest formulas assume the rate of return is consistent over the time period and does not decrease, which means it really only approximates fixed return investments, not risky investments like stocks. But it can get you a mathematical ballpark. For example, when I used my favorite interest rate formula for a quarterly compounding investment over 5 years, I got an equivalent rate of 9.68% given the numbers you cited for monthly savings.

[harrychan]

When we refinance, we always go to a broker and let the banks compete. Seems to work out for us. The first refi we did our home value went down from $600k to $590k but it was expected. We just refinanced recently and it went back up to $610k so we are very happy.

[Dr. Gaius Baltar]

So using a mortgage broker I might be able to get a lower interest rate than Aimloan's 7/1 ARM @ 2.625% with no closing costs (aside from escrow and interest)?

Do mortgage brokers cost anything? Do I have to go in person?

[kakapo]

Do mortgage brokers cost anything? Do I have to go in person?

Generally, no and no. It's very easy to call and get a quote. No way they can charge you if they don't have your CC number...

We've had good experience w/ brokers and the few times I've done the Pepsi taste test, the broker rates were cheaper than the banks I thought of to call directly (including our current mtg holder whom we told we were thinking of refinancing).

[Sbashore]

Does anybody else think that there's something fishy going on with the appraisal value? How can our home have lost 16% of its value compared to 6 months ago? The appraisal company is even the same.

Is it possible that Amerisave is manipulating the appraisal value in order to retain me as their customer on the current 3.75% mortgage? Could they be ordering the appraiser to appraise the home for $425,000? In the past, I've had bad experiences with lenders changing appraisal values in order to either keep me in their current mortgage, or prevent me from going somewhere else. When I had a mortgage with Bank of America, I tried to get them to refinance me to a lower rate than 5.25%, and they insisted over the phone that the appraisal would come out to only $350,000. When an appraiser selected by Bank of America came to appraise the property for a prospective refinance, lo and behold, they appraised it for $350,000. When I then went with US Bank to refinance to 4.25%, their appraiser appraised it for $490,000.

Do lenders give you high appraisals to gain you as a customer, and then low appraisals if you want to refinance with them, in order to restrict you from doing so?

That was my first thought. I almost lost a newly constructed home because of a bad appraisal. I asked for a field review of the appraisal (denied by lender), so I got a private appraisal and then procured a new loan with yet another appraisal. It can happen and cause huge headaches. I guess it's not impossible that Amerisave would be manipulating the appraisal, but I doubt it given the illegal nature of the action and the liability attached to such an action.

[Valuethinker]

Does anyone think that Option 2 is worthwhile?

Yes, absolutely. The return on the $36,000 is very high. First you pay 3.25% less in interest on the $36k. Second you save the $1,800/year PMI. It's a 8% return right there. It wasn't Amerisave's fault the appraisal came in low. So I wouldn't punish Amerisave for it with the rescission.

+1

It feels like a no brainer. Sell some bond funds and reinvest it in this far higher returning action.

[Valuethinker]

I'm trying to determine my rate of return on refinancing if I have to pay down the mortgage to get the refinance. Can someone confirm if I have my math correct?

Yearly Mortgage Payment Savings / Amount of money I have to reduce the mortgage to get these savings = rate of return

So if in order to get a 2.625% 7/1 ARM with a monthly savings of $386.39 (yearly $4636.68) I have to reduce the mortgage by $36,000, then my rate of return is 4636.68 / 36000 = 12.9%/year. Is that correct?

That would be for the first compounding period. You're missing the effect compounding would have on the $36,000 if left in investments for the considered time period. This leads to an overestimated rate of return.

What you want to calculate is when would the interest earned over the time period be greater than or equal to the savings on the mortgage over that same time period. To calculate the interest earned, you need a compounding interest formula (and usually these formulas calculate the TOTAL principal after the time period, so don't forget to subtract the original principal to get the interest earned). Then you'll set up an equivalency equation and solve for the rate. You'll likely need a calculator that is capable of calculating exponents/roots other than squared or cubed.

And keep in mind that most compounding interest formulas assume the rate of return is consistent over the time period and does not decrease, which means it really only approximates fixed return investments, not risky investments like stocks. But it can get you a mathematical ballpark. For example, when I used my favorite interest rate formula for a quarterly compounding investment over 5 years, I got an equivalent rate of 9.68% given the numbers you cited for monthly savings.

I don't disagree with any of the above, but this is a MS Excel problem I think?

There are some nice amortization functions built into Excel, help files are usual gobbledygook but if you surf around the web OP should find some examples.

Risk equivalence is *really* important here. Reducing interest on your mortgage is equivalent to investing in US Treasury Bonds (there's a tax effect if your mortgage interest is tax deductible-- you have to use after tax. Note of course if US tax rates go up then that is *more* valuable). ie risk free

Investing in stocks is much riskier.

The only reason to choose investing in stocks over a lower mortgage interest rate is if you lose tax exempt space (ie your annual limit, then unused). That's a trickier calculation.

But generally the 'delta' from getting out of that 'highly mortgaged' state (ie requiring payment insurance) is so large that it's worth doing.

It's a 'cost saving' rather than an 'investment decision' per se. You just have to invest up front to get the cost saving.

[Valuethinker]

That's Bank of America alright. Did you already have a loan with them and were you trying to refi?

Recently I have been giving some thought to trying a new lender. The whole process feels like rolling the dice. Very frustrating.

I hear you. There's absolutely no rhyme or reason to these appraisals, which is what makes it so nerve-wracking. You get the wrong appraiser, and your house loses half its value? My god!

Happens after every housing crash.

They are terrified of being sued by the mortgage lender or other party (eg Freddie or Fannie, who accepts the mortgage for securitization) for overvaluing the home and thus disadvantaging the lender.

So the housing lending market tightens up--until the next bubble, of course.

[Valuethinker]

1) Proceed with the refinance, but pay ~$153.62/month in mortgage insurance premiums due to the LTV being so high now. I haven't been paying mortgage insurance before.
2) Lower my mortgage to $340,000, which would require paying down the mortgage by $36,000 immediately.
3) Cancel the loan and pay for the appraisal and credit report only (about $465).

Current mortgage at 3.75% is $1,752/month. With 3.25% it would be $1,637 with no mortgage insurance premiums at the current loan balance ($376,208), or $1,479.70 with no mortgage insurance premiums at $340,000.
I am maxing out my 457 and Roth IRA contributions.

It seems to me, without doing the spreadsheet over the life of the mortgage, that in choosing 2 over 1 you are spending $36000 to save about $1900 pa? About a 6% rate of return? Ignoring tax effects.

If I proceed with option 2, it would be with money withdrawn from my taxable account that would otherwise have been invested in a 27/73 stock/bond fund portfolio.

I intend to keep this house until 2016 or 2018 before moving.

Does anyone think that Option 2 is worthwhile?

And you are using taxable money to do this-- so assuming no capital gains tax to pay on sale of assets, you could simply draw down your fixed income. Your after tax return on risk free fixed income right now is sub 2% (US Treasury 10 year bond yield).

So this $36000 investment would triple your rate of return (pre tax, I have ignored mortgage interest deduction) for no risk.

That says, on a rough rule of thumb, that it's a very good investment.

[Dr. Gaius Baltar]

Yes, I have decided to reduce the mortgage balance to whatever level is necessary to proceed with the Aimloan 7/1 ARM 2.625% refinance without incurring mortgage insurance costs.

I've also found an easy to use calculator that determines your rate of return on your refinance if you have to put cash in to refinance. The return on investment it spits out is nearly 14%!