How to quickly determine appraisal at refinance time
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By Ken Weise  October 25, 2013 12:00 am

As house prices continue to rise, the chance to refinance is ever more present, considering favorable rates are still at historic lows. One the biggest dilemmas Sonoma County homeowners face is having a favorable appraisal valuation to refinance.

Here’s a simple calculation any homeowner can do: Divide your current principal loan balance by .8. Doing so will support 20 percent equity.

Before we dive into the intricacies, Making Homes Affordable is an important alternative because there is no loan-to-value restriction or appraisal calculation necessary.

Harp 2 Refinance

Under Harp 2, if the loan is owned by Fannie Mae or Freddie Mac, and the loan was delivered by June 1, 2009 or before, and a consumer has not previously used the program and its not an FHA Insured Loan, most homeowners are automatically eligible to refinance. Supporting financial documentation will be needed, but there are literally zero loan-to-value restrictions. Consumers should research to see who owns their loans at Fannie Mae or Freddie Mac. Don’t be fooled into thinking you’re eligible for Harp 2 by a run-of-the-mill lender. Do the two-minute legwork.

On most homes, taking your principal balance and dividing it by .8 will give you the value your house needs to appraise at assuming you’re not interested in paying monthly PMI, (most are not fans of PMI).

As such, the calculation does not take into consideration monies for closing costs. If you take approximately 1.25 percent of your loan amount and add that to your principal loan balance, then divide by .8, that math can give you a better barometer of needed value if you plan to finance the fees. If you can cash finance the fees, the .8 figure remains more accurate.

Running the numbers

• Cash financing closing costs: Take a principal balance of $301,234 and divide by .8, which comes to $376,542 as the appraised value your house would have to appraise at in order to refinance without mortgage insurance bringing cash to the closing table for fees.

• Rolling fees in: On the flipside, by multiplying the principle balance of $301,234 by 1.25 percent, you come to a the total of $3,765 (1.25 percent refinance closing costs amount is a bit high, but being conservative). Adding $301,234 to $3,765 brings the total to $305,000 as a new loan (rounding up). Dividing $305,000 by .8 brings the total to $381,249 as the lowest value needed financing the fees.

Calculation for refinancing on home occupancy

For our purposes, these calculations are best suited for traditional conventional financing on loans up to $417,000 (assuming they are not Harp 2 Eligible).

Primary home

• Worst-case scenario: Divide principal balance by .95 percent, indicative of conventional 95 percent loan-to-value financing. In such a scenario, plan on having monthly mortgage insurance (PMI).

• Best-case scenario: Divide principal balance by .8, indicative of conventional 80 percent loan-to-value financing.

Secondary home

• Worst-case scenario: Divide principal balance by .9, indicative of conventional 90 percent loan to value financing, and mortgage insurance (PMI) becomes applicable.

• Best-case scenario: Divide principal balance by .8 indicative of conventional 80 percent loan to value financing.

Investment home

• Best- and worst-case scenarios: Divide principal balance by .8 indicative of a conventional 80 percent loan-to-value financing (20 percent equity or more is required on investment properties – mortgage insurance unavailable).

By being able to compute these important numbers on the fore front of the process, a smart consumer can get a wider range of shopping options available to them because they will know the approximate loan-to-value to provide mortgage lenders in their shopping efforts.


Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at

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