It's no surprise that we refinanced--after all, interest rates are at record lows and even though we didn't buy too long ago, we'll have significant savings with our shiny new rate.
There's a bit of a story to this refinance, though (isn't there always?), because it was actually our second try. About a year and a half ago, we tried and failed to get a new mortgage. It made me so angry at the time that I didn't want to vent here, but now that some time has passed and we actually did get through the process this time, I thought I'd share.
The problem was, as is probably the case with most failed refinances, that our house price had declined. We'd been owners for a little over a year and felt pretty confident that our area had pretty solid sales and prices, but the appraisal process didn't go very smoothly. Appraisers are selected at random and completely independent from the bank offering the new loan. Not everyone's application requires an appraisal, but if the sale is relatively new and not very much has been paid into the loan, it's pretty typical. These are pretty big changes from the last decade when I think all you needed was a pulse to qualify for a loan.
We had all our paperwork in and just needed to make sure that the home value didn't drop low enough that we wouldn't clear a 20% downpayment. Because even standard (non-interest-only loans) pay down very little principle upfront, after about 15-16 months we still had almost the same amount of principle paid as when we closed, so the house value had to stay almost the same for us to make our number.
Here's a math example, not using our real figures: Say we had a $300,000 house and put down our 20% of $60,000. We'd have a loan of $240,000. Then say our house appraises for $280,000--a loss of $20,000. When we try to refinance, we'd have to clear that 20% of the new amount, i.e. $56,000. 280,000 - 56,000 is $224,000. But after a year paying down our 240, we've still got a loan for, let's say, $234,000. We'd need an additional 10k downpayment to make up the difference between 234,000 and 224,000 to be at that new 20% point.
So, in a nutshell, we weren't there. Our house value declined about 8%, which would have meant putting down a significant new downpayment or incurring private mortgage insurance. We might not have minded, except that the appraisal (and appraiser) was a nightmare and we didn't feel like the number accurately reflected our home.
First, he decided that our 4 bedroom home only had 3 bedrooms. He told us there was a law on the books that said that a room with no closet didn't count as a bedroom. Fair enough--maybe. Except that he wasn't obligated to show us the law and couldn't demonstrate to us that we weren't "grandfathered" in (usually laws like this apply to homes built after the law passes, but not to older homes). Neither of our real estate agents had even suggested this was an issue (and ours was pretty good about pointing out places that identified "bedrooms" that couldn't qualify as bedrooms legally).
Second, he told us that this call was at his discretion and that even though it might not technically qualify as a bedroom, he would call it one for the appraisal (which already suggests to me that the law is not very clear cut). And then he LIED by not counting it on the paperwork. So that's just a jerk thing to do. At least be upfront with us.
Third, the comps he used reflected only the worst on the market that could possibly compare with us. Most had 2 bedrooms (not even the 3 he was willing to count), some had only 1 bathroom (we have 2.5), and most have fewer square feet. Some were over a city boundary in a lower-income area with fewer town amenities. There were better examples, but he didn't use them.
Another problem that we realized in retrospect is that this attempt was taking place in December. So even though we felt he had some good comps to pick from, it was not exactly the height of the housing season (comps are usually pulled from a 3 month window). That was our bad.
I was pretty livid--the paperwork process was intense and we'd spent a lot of time working on it. I felt like we didn't get a fair look so we appealed the appraisal with his company. Unfortunately, they backed his numbers and we didn't have time left on the validity of our paperwork and credit checks to hire a new appraisal company, so we were in a take-it-or-leave-it scenario. We left it. Not just because our home value declined but because we felt it wasn't an accurate decline.
Fast forward another 18 months or so. By now interest rates have dropped even more, so we're actually glad we didn't put money into refinancing last time. A few months back we looked into applying for the government refinance program, HARP, which helps homeowners whose home values have declined. Unfortunately, we bought our home just a few months too late to qualify.
We started the reapplication process again in April but after some missed calls and other delays, didn't really get the ball rolling until June. The appraisal was in July--a factor which I think helped us given all the recent home sales in our neighborhood (much more volume than the December time frame).
We also were guaranteed that we wouldn't have an appraisal with the same company, though I didn't know that until afterwards. The appraisal form has a spot for the appraiser to verify that they have not appraised the home within the last 2 years.
But the one thing we did that I think had some impact--besides the luck of the draw of getting a nice appraiser--was actually prep the house to make it more presentable. Even though an appraiser should mostly consider the "bones" of a house, I figured it wouldn't hurt to stage it a little bit. It prompted us to clean out the breezeway and transform it from a cramped storage space to a pretty seating area. It also prompted us to finally install a light in the "non-bedroom" and straighten the room up from what was my furniture refinishing space to something that at least approximated a real bedroom, in the hopes that might influence the determination on whether it counted or not. So we went from this:
We also put together a print-out on all the improvements we'd made since we bought the house (this blog made it nice and easy to go back and remember what we'd done). And since the last attempted appraisal, we had done some major work like energy loss mitigation, the bathroom remodel and chimney relining and capping.
In the end, our house appraised for exactly what we paid for it!!!! That might seem bad, given decades of rising values--especially given the money we'd put in--but it was all we needed! We had our downpayment in place and didn't need to put any extra money into the refinance except closing costs. Plus we got our 4th bedroom back! In this case, it paid to be patient and try our luck again. And I think it was a good thing that we didn't ask the county to update our tax form to record the loss of a bedroom. It meant one more year in taxes on a room that at least one appraiser didn't think counted, but it kept us on the record as having the bedroom. The appraiser also noted how lovely our breezeway was, saying it was a shame how many people let those rooms just turn into ugly storage spaces (if he'd only seen it a week early...) so I do think that the staging worked to our advantage. Whatever the causes, we now have a shiny, new mortgage with lower payments and a chance to pay it off faster. Yay!
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