If you’ve been underwater on your mortgage — owing more than the market value of your house — or live in an area where home values are struggling to recover after the recession, it can be hard to know whether you’ve regained enough equity to make a mortgage refinance work in your favor.
“Equity” is just a fancy term to describe the difference between your home’s fair market value and the outstanding balance of your mortgage. If the market value is higher than what you owe, you have equity — and you might be well positioned to refinance your mortgage. In some markets, homeowners have been enjoying double-digit price appreciation as property values climb.
Others haven’t been so lucky and have “negative equity.” Six million U.S. homeowners are currently underwater on their mortgages, a grim reminder of the 2007-08 financial crisis. As many as 820,000 of those borrowers owe 20% or more than what their homes are currently worth, according to the most recent Zillow Negative Equity Report.
Don’t panic if you’re still underwater, though; you can take steps to refinance and improve your financial situation. And even if you’ve been turned down in the past, you might qualify this time. Homeowners have several ways to learn where they stand on equity.
Check online portals
To get a general idea of your home’s value, you can check online real estate portals for an automated estimate of your home’s value, such as Zillow’s Zestimate.
These types of estimates give you a sense of your home’s worth based on comparable sales and listings on the market, but an online estimate is not always perfectly accurate, says Joe Parsons, senior loan officer with PFS Funding in Dublin, California.
Also, pay attention to what homes in your area have sold for recently. If you see open houses nearby, take a few minutes to walk through those properties to see how your home stacks up against what’s on the market and better understand why sellers are asking certain prices.
NerdWallet will monitor your home value and home equity so you don't have to.
Ask a real estate agent or lender for an expert valuation
The second way to find your home’s value is to consult with a real estate agent who’s active in your neighborhood. Real estate agents can provide a comparative market analysis, which looks at recently sold listings and comparable homes now on the market. A CMA allows you to measure your home’s value based on size, condition, amenities and other key attributes. Most agents will provide a CMA upon request at no charge.
Another low-cost route is to ask a potential refinance lender for an automated valuation model report, Parsons says. An AVM is far more reliable than an online estimate, which typically has little or no context. Most (if not all) lenders produce AVM reports, which cost about $20.
These reports pull the same data as a home appraiser would, but they cost a fraction of what an appraisal does. Property appraisals are the most accurate and thorough way to find out what your home is really worth, but because they cost about $500 on average, you don’t want to pay for one unless you’re serious about following through with a refinance.
Positive equity? You can move forward with a refinance
If you’re fairly confident you have a good read on your home’s value and it’s worth more than you currently owe on your mortgage, find a mortgage lender to help you get the refinance process started.
First, your lender will order a property appraisal from a professional real estate appraiser, who will thoroughly inspect your home inside and out. The appraiser will look at your home’s size, condition, location, improvements and defects, as well as recently sold listings and current homes on the market, to come up with an official value for your home. (Tip: You can help your home’s appraisal value by doing a few key improvements.)
The key is to get the ball rolling now while rates are still low and you have positive equity, says Matt DeCesaro, branch manager of Homebridge Financial Services in Johns Creek, Georgia.
“There are a lot of people sitting on the sidelines because they just don’t know their options,” DeCesaro says. “Sitting down with a mortgage professional for an hour or two could be a big game-changer.”
If you’re underwater, there’s help
Let’s say an online estimate and an AVM report find your home is worth less than you owe on it. Chances are an appraisal will reflect similar results. If you’re struggling with payments and you can’t refinance because you have negative equity, there are options to take some of the burden off your shoulders.
There are two programs designed to help borrowers with high loan-to-value ratios.
To take advantage of the Fannie Mae option, your loan must be owned by Fannie and you must owe more than 97% of your home’s current value. To use the Freddie Mac option, your loan must be owned by Freddie and you must owe more than the maximum loan-to-value limit for a standard ‘no cash-out’ refinance mortgage, which is 95% for a single-family primary residence. Both programs require that the refinance result in a benefit for the borrower, such as a lower interest rate or monthly payment.