If you took out a mortgage with a high interest rate and your credit score has since improved, you might be thinking about refinancing to lock in a lower rate. You might also be considering a refinance if you have an adjustable-rate mortgage and your interest rate will reset soon.
Your ability to refinance your home loan depends on a number of factors. Some are specific to you, while others are beyond your control. Shifts in the real estate market can make it challenging to refinance your mortgage.
Why You Might Find It Tough to Refinance
A lender will usually only approve a request for a refinance if a borrower has a loan-to-value (LTV) ratio of 80% or less. Your LTV ratio is your outstanding mortgage balance divided by your home’s current market value, then converted to a percentage.
If your house’s value has recently declined, your LTV ratio might be too high to qualify for a refinance. Even if you have diligently paid your mortgage on time every month and your LTV ratio used to be below 80%, recent shifts in the housing market might make you unable to meet a lender’s guidelines.
Why Your House’s Value Might Have Fallen
Home prices rise and fall depending on the amount of inventory available for sale, the number of interested buyers, and people’s ability to qualify for mortgages. One or more of those factors might have caused your house’s value to decline.
An economic downturn, high rates of unemployment and a string of foreclosures in the area can drive property values down. Other factors, such as unkempt properties, under-performing schools and a lack of conveniently located stores and amenities, can reduce demand for houses and cause property values to drop.
Broader economic changes can also impact home values. Rising interest rates force borrowers to make higher monthly payments. To keep their housing costs affordable, buyers will be more likely to purchase less expensive properties and take out smaller mortgages. That can drive housing prices downward.
What to Do If You Can’t Refinance Your Mortgage
If your application for a refinance was denied because of a high loan-to-value ratio, you might still be able to refinance. If you can afford to pay a lump sum, you might be able to reduce your mortgage balance and your LTV ratio enough to qualify. Â
If you’re struggling to keep up with your monthly payments and refinancing isn’t an option, you can contact your lender and request forbearance or a loan modification. If you want to pay off your mortgage ahead of schedule, you might be able to do so simply by making extra payments. Before you do that, contact your lender to find out if you would be charged a prepayment penalty.
