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I hope everyone is meeting or surpassing their financial goal from the income they’re making of their spare room.  I myself, have certainly achieved my goal of paying off my second mortgage and refinancing my first mortgage to favorable rates – this was a few months ago.

With that in mind, I want to share the refinancing process because one of the requirements is having your home appraised by the bank.

An appraiser is someone hired by the bank to come walkthrough your house and determines the conditions and upgrades so that calculate an accurate value of your house.   The main driver for the appraisal is really for the banks to determine if the house value justifies the loan you’re taking out.  The appraiser could care less if you’re house it worth a lot of money or nothing at all.

Now, getting back to the appraiser walkthrough.

This normally wouldn’t be a probably if you’re the only person living in your home.   However, when you’re renting out a room, the situation is a bit different because you want to respect your roommate’s privacy, but still allow the appraiser to do their job.

Do you let them in your roommate’s room?

Let me share the route I took to refinance my house.

When I refinanced, I had an option between a traditional refinance and a home equity loan.  The latter is a type of loan that’s taken out against equity of your home.  In my case, at the suggestion of my mortgage specialist, I applied for the home equity loan and tapped the value of my house versus the equity because I had Loan to Value ratio of 80 percent.  This option allowed me to lower my interest.  However, I wasn’t able to lower my interest rates to current market rates because it was a home equity loan, but I did avoid paying several thousands dollars worth of closing costs.  So it was a trade off that was worth it to me.

To summarize the advantages and disadvantages of both loan instruments,

 

Home Equity Loan:

Advantages:

  • Quick process, the application is much shorter
  • No bank appraisal, the banks look at comparable sales
  • No closing costs

Disadvantages: 

  • Interest rates are not as low as a traditional refinance
  • Early Pay off fees applies(about $400 in my case)

 

Traditional Refinance

Advantages:

  • Interest rates comparable to current market rates

Disadvantages:

  • Closing costs, usually run about $2,600 to $4,000 depending how much you refinance
  • The application process is longer
  • Appraisal required as part of the process

MY APPROACH

Keeping out of pocket cost was my main focus, hence the reason why I went with the home equity loan.  The ancillary benefit was avoiding the entire appraisal process, which worked out for my particular situation.  Neither my roommates nor I was bothered with an appraiser.

Now, thinking about if an appraiser had to do a walkthrough, I would have given my roommates advanced notification or made sure it was scheduled during a time my roommates were home so that they can watch the whole process unfold.

 

MOVING FORWARD

With interest rates dropping, I’m deciding to levy up the $400 early payment fee to refinance to lower rates.  Right now, I’m locked into a fixed 15-year 4.6% home equity loan.  Not the greatest, but given the fact I paid nothing to refinance I can’t complain.  Another bank, actually a credit union is offering an “accelerator” mortgage, which offers an 8 year 2.99 % mortgage.  The best part of this deal is there are no closing costs.  So if I hop on this opportunity, I’ll essentially be getting the same rate at a 15-year mortgage without the closing costs.  The caveat however, is the 8-year amortization period, which will increase my payments.  This is precisely why I have not jumped on this opportunity.  I really want to build up my savings rather than tying up money in real estate.

 

That’s my situation right now.  Any suggestions or thoughts are always welcomed.

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