No Loan Conversion, For Now...With home appraisals being totally dependent on comparable sales in an area, I mentioned in a previous blog post about how I was curious to see what the appraisal for the Starter Home 2.0 Project ends up being when it is being compared to something that doesn't exist, which is new home construction in Pleasant Ridge. Well, unfortunately this anomaly came back to bite me yesterday, when the post-construction appraised value came back almost 20% lower than what the original pre-construction appraised value for the home was, despite being built to the exact standards of what the original plans called for. The loan processor at Guardian Savings Bank was just as shocked by the outcome as I was, saying she had never seen this before. So what caused such a dramatic change in appraised value since the original appraisal in March? And what does that mean for the loan conversion I was prepared to execute?
Here is the way I see things. Pleasant Ridge is widely considered to be one of Cincinnati's next hot neighborhoods and is well on its way with rising home values as an influx of people and businesses have started to relocate to the area in recent years. The problem is that it is a small neighborhood, and the neighborhoods surrounding the Ridge are very dissimilar, which means the pool of comparable sales for appraisal purposes (which must have occurred within six-months of the appraisal) is extremely small, making the appraised value of the Starter Home 2.0 highly susceptible to bad comps, which is what I was the victim of this time around. The good news is that a few months from now, the appraised value could well jump up 20%+ again when better comparable sales become available, like the rehab two doors up the street from my house, which is going on the market soon.
Unfortunately, from a loan conversion standpoint (converting my adjustable-rate mortgage to a fixed-rate), the drop in appraisal puts me below the 80% Loan-to-Value ratio the bank needs to convert the loan without requiring the purchase of mortgage insurance or paying down the difference, which I am not willing to do.
For the time being, my plan is to just ride with my current loan and look at converting it over to a fixed-rate some other time when there are better comparable sales in the neighborhood for an appraisal.