Bad appraisal should I still refinance?

Question

I am in the process of refinancing (conventional) an owner occupied duplex. Purchased with an FHA loan 3.5% down in 2018. Due to lack of any comps in my town, appraiser used sales from another less desirable town and appraised ~$30-40k lower than expected.

To complete the refi now, I would have to cash-in $27k. Interest would go from 4.25% down to 3%, and get rid of MIP for the life of loan. Currently the property would break even if I move out, but this would reduce the mortgage ~$500/month making it much more desirable to own. Should I tap into retirement savings to fund this?

Tyler Warne · Answer

Can you derive an adjustment for the difference in towns? Could you find 3 comps of a single family that is common in both and show that there is a 5, 10 or 15% difference in the location? That would be sufficient support to help the lender go back to the appraiser and say - the borrower states there is a difference in location, here is his evidence...

-Tyler

Tyler Warne · Answer

@Chris Sullivan I think that would at least be a start to an argument. You could approach the subject like, i sure seems like the 15% difference in sfr values should mean something in the 2-4 unit space. This could also be supported by land values, rents etc. If you get $150 per unit more than the duplexes in the other town that would equate to $300 x (his GRM) we'll use 125 = $37,500 more in value on an income approach.

Chris Sullivan · Answer

Dan that is correct, I would be taking a loan out of my 401k to put cash into the refinance. Any interest on the loan (~1.8%) is paid back into the 401k account with a $50 application fee. I think you are right not worth it a this time. Either need to get the appraisal adjusted upward or wait for some more favorable local comps and/or force appreciation.

Chris Sullivan · Answer

Thanks for the input Tyler, that would be a good way to present to the appraiser who is not from the area. Just looking at the Zillow Home Value Index (ZHVI) for the two towns there is a 15% difference between the towns. I know all Zillow data should be taken with a grain of salt, but this is a long term trend ~10yrs showing the difference.

I'll try to put some actual sales together to bring back to the appraiser. On the appraisal sales comp approach form there is no adjustment for location, can they just pencil this in?

Dan M. · Answer

Could you give a little bit more information? So are you taking money out or are you being forced to put money in? I would not tap my retirement savings to save 1.25% your going to pay more in interest to yourself by borrowing. So if I'm reading this correctly its a losing proposition to refinance at this time.

Bad appraisal should I still refinance?

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