Harsh Reality of Housing Bubble Bursting

Over the past few weeks rates fell low enough that I was able to lock in on a 3.5% 30yr fixed mortgage refinance with no closing costs* on our primary residence. We last refinanced in 2010 @ 4.375% for a 30yr fixed. I personally prefer no closing costs loans because it makes the refinance decision process easier: if you can refinance for a lower rate, with same term and no closing costs, then you will come out ahead.

Once I locked in the rate, the refinance process was full steam ahead. I've heard a lot of folks comment about how difficult the loan approval process is these days and was expecting it to be more difficult. However I found that it wasn't significantly more difficult than previous loan applications except that we had more assets/accounts that we had to document. Not that I'm complaining.

Our loan was approved in about a week and we scheduled the appraisal. I was slightly concerned about the appraisal value as the last refinance we did a cash out refinance to pay down a higher interest mortgage on one of our rental properties. However I was thinking worst case I would need to contribute ~$15k to the loan to restore it to 80% LTV if the appraisal was on the lower than expected side. After all the appraisal in 8/2010 had the house value at $320,000 so as long as the house appraised at $290,000 or above I we would be in good shape. I was expecting the new appraisal to come back in the $295k-$310k range.

Well I was hit in the face with an email last week indicating the new appraisal came it at $270,000. Ouch! The appraiser is indicating that the house has dropped $50k in value in the past 25 months. That hurts. I'm going to file an appraisal appeal, but been warned that appraisals rarely get revised. After that, I'll have to look at my options to see what makes sense.

*To clarifying no closing costs technique used, I accepted an above market interest rate (3.5%) for a credit equal to the closing costs associated with the refinance (origination fee, appraisal, recording fees, etc.

Related in Real Estate:

No Closing Cost Loan Example (Nov 29, 2012) I've gotten multiple requests to clarify the recent no closing cost refinance loan I just completed. Its a bit of a vague term and could be done different ways, but the end result is that there are no out of...

3.5% 30 Year Fixed No Closing Cost Refinance (Nov 27, 2012) We finally closed this week on our 3.5% 30 year fixed refinance with no closing costs (no closing costs = a credit from lender/broker large enough to offset refinance costs). It took us over 2 months (67 days from initial...

Appraisal Appeal Unsuccessful (Nov 05, 2012) Not much of a surprise, the appraiser dug in and didn't budge after we submitted our appraisal appeal: Our more favorable comparables were based on county property records. Interestingly the appraiser indicated the MLS data is generally considered more accurate...

Comments (6)

Hopefully the appraisal will be raised or you can find the cash somewhere else so that you can lower the rate on your mortgage.

If you are not able to refinance will you lose your appraisal fee?

I'm assuming the answer is yes, that has always been the agreement in my no point no closing loans/refinances.

I started with a 5.25% 15yr fixed in April 2008, I refinanced to a 4.0% 10 year fixed in October 2010 and a 3.5% 10 year fixed in November 2011.

As long as the rates stay down - I will refinance again next January - if not - no big deal. I'm going away on for 5 weeks in November and December thus do not want to start anything now.

Good luck!

Posted by David | October 19, 2012 12:30 PM

See if you can do a 1st mortgage for 80% of the appraisal and the take HELOC for the difference, rates are generally prime plus/minus a margin of 1% or less.

Posted by Jay @ effumoney | October 20, 2012 11:52 PM

In light of this 50K decline in the estimated appraisal, does it make sense to revalue your portfolio to reflect the appraised value of real estate rather than the cost basis?

Posted by Steve | October 21, 2012 11:13 PM

Steve,
Its a good question - thoughts? Im struggling with it a bit as appraisals are only a snapshot in time (cost basis is too is I guess) and if I devalue the asset now, should I increase the value at some point in the future assuming it goes up? The write down would be $30k on our balance sheet as the cost basis was $300,000. I want to error on the side of being conservative, but starting to write down assets seems to open things up for future adjustments upwards as well.

Posted by 2million | October 22, 2012 10:26 AM

My sister is going through a similar situation. What her bank told her was they just look at the neighborhood and square footage. They don't care if you put 40k into the property to fix it up etc. So bank appraisals kinda favor just shitty houses with lots of sq feet. Or don't favor if you want to pay a lower tax bill in the long run : )

Posted by Shane | October 22, 2012 12:27 PM

there's a few options.

1. keep it simple.
keep the price paid for the house in your portfolio constant. there's no guess work involved.

downside is over a long period of time (10-20 years), the purchase price may diverge significantly from the current market price.

2. annually adjust the price of the house based on neighborhood sales comps.

this is tricky because judgment is involved and if you're emotional you'll tend to over value the property and end up overstating your net worth.

also timing matters, if you use jan comps, these prices will typically be depressed compared to april comps when the selling season is full gear.
in volatile markets prices could change as much as 10% in a year.

for the super lazy, there's zillow's zestimate which is frequently criticized for being inaccurate. and the fact that they change their automatic pricing algorithm regularly which can result in wild adjustments. having said that, zestimates are completely unbiased.

3. adjust the price at an even longer interval; maybe every 5 years.

after 5 (or how ever many) years, you should have an idea whether the purchase price is close to the current market price and you can make adjustments if necessary.

ultimately, you want an accurate reflection of net worth. you don't need a precise number, just something in the ballpark.

i might do 2) using zestimates. property value gets adjusted yearly, and it's fast, simple and mechanical (important because i'm super lazy). the potentially large error in the zestimates is less important i suspect since over the long term, they should get smoothed out.

Posted by * | October 26, 2012 10:50 AM