Just a few months ago, my wife and I talked about how much money we were going to save by refinancing our 6 percent fixed-rate mortgage down to 4.25 percent interest. A few years earlier, we would have been crazy to think that we could refinance our mortgage loan from 6 percent to an even lower rate. But the chance to find a better mortgage rate was one of a few bright spots in the U.S. real estate market's dreary past three years. Lenders were forced to offer refinancing deals with 50-year-low interest rates in order to stay in business, and we wanted our piece of the savings that many other Americans were getting.
We didn't know at the time, but the process of trying to refinance our mortgage would prove to be a tiring and frustrating experience. It sounded so easy in the beginning: just fill out the typical paperwork, get another appraisal, pay some closing costs and mortgage fees, and we'd save around $250 a month on our monthly mortgage payment. As expected, the paperwork wasn't a big deal.
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But the next seemingly simple step became a surprisingly difficult challenge: another appraisal. Like so many other people, we believed that our home must be worth more than we owed after two years of payments and a significant upfront down payment, especially considering that we bought the house for $70,000 less than the list price. It turned out that we were way off. The appraisal came in at a value of $30,000 less than what we owed. We fought the comparison set that the appraiser used—and then we fought some more—but we got nowhere and realized that getting our mortgage refinanced wasn't going to happen.
Unfortunately, this experience has been an all-too-common one that many Americans have faced during the housing market debacle, something I learned when I recently decided to seek out more refinancing horror stories from everyday people like me. Sure enough, I quickly found that I wasn't alone in my frustration. Interestingly, I found three common themes in people's refinancing nightmares:
1. Low Appraisals
Tracy from Central Mississippi, whose experience was closest to mine, describes the difficult obstacle she faced: "My husband and I tried to refinance over a year ago. He's self-employed, and we'd never had a late payment. We weren't struggling to pay our current loan, but we wanted to lower the number of years left and take the opportunity to lower our interest rate. We contacted Quicken Loans, paid a $500 appraisal fee, and they sent an appraiser out. After he returned with a low appraisal, we were turned down."
On the initial assessment, the appraiser did not like an added structure on the property—not yet converted into a mother-in-law suite—and Tracy believes the home's appraised value suffered because of the structure. Tracy begged and pleaded Quicken Loans to return for another appraisal where she could also help allay some of the concerns about the home. Not only did the appraiser decline to re-evaluate the property, but Quicken Loans also refused to return the $500 appraisal fee. Fortunately, while Tracy and her husband couldn't avoid the stressful ordeal of a cripplingly low appraisal, eventually a local bank refinanced their mortgage in December 2010.
2. Irregular Income
Even if you don't face appraisal aggravation, your road to refinancing can have plenty of other obstacles now that banks have tightened their underwriting guidelines. Todd from Orange County, California explains: "When we first applied for a mortgage refinance with Wells [Fargo], the agent suggested using an outside approval service for our application under the Home Affordable Modification Program (HAMP). This was because I am self-employed, so I couldn't provide pay stubs."
An insulting, but common, start to the refinancing nightmare is finding out that even though you may be making steady money, your lack of proper income records means you may not be approved. Moreover, even if you are successfully self-employed or operate a small business and have adequate bookkeeping records, if you don't have at least two years of documented income history, lenders won't deem your income "steady" enough. As a result, successful freelancers and small business owners can face extreme trials and tribulations in attempts to refinance or obtain new loans. Overall, it can be very difficult to get a mortgage when you're self-employed.
3. Ineligible Income
Continuing on with this theme of "unacceptable income," Melanie from Philadelphia described to me one of the most unbelievable refinancing nightmares I've ever heard. She collects a steady income from a long-term severance package and has over two million dollars in retirement assets. She explains her story: "While I'm currently looking for work, thinking about starting a small business, and expecting to be re-employed in some capacity in the very near future, the new refinancing rules don't allow lenders to count my current severance income (full salary until next summer) or my retirement assets (just shy of two million dollars) in their calculations as income."
As you can see, even people with extremely high net worths are struggling to refinance their mortgages! There's no greater refinancing shock than knowing you have money, having a regular check come in, and supposedly still not having enough valid earned income to qualify for a mortgage refinance or new loan.
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Final Word
If Melanie's assets couldn't justify approval for refinancing, it had to be nearly hopeless for people just starting out like us. At least in my situation, I stopped fighting the appraiser once I knew that reconsideration was out of the question. I could have obtained a second opinion, but it would have cost an additional $400 or $500 for another appraisal. It just wasn't worth it to me. I didn't want to dig myself into a deeper hole.
Refinancing is still a feasible option for many homeowners, but as rates keep inching higher, taking on the ordeal is less desirable than it was four or five months ago, when even people like me with a 6 percent fixed rate wanted to refinance. Be sure to carefully weigh the pros and cons before entering the challenging world of refinancing.
Do you have any refinancing nightmare stories? Did refinancing work out for you? Share them in the comments, and let us know how you were able to overcome the obstacles—or if you were forced to give up.
Erik Folgate, a homeowner who lives in Florida with his wife and baby son, is a contributor to the Money Crashers personal finance blog, where he discusses topics such as government and economic policy, and provides tips for getting out of debt and improving your financial fitness.
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