Getting your home appraised is a key part of the mortgage refinancing process. The appraisal provides the lender with an estimate of your home’s current market value. This helps the lender determine loan terms, including the maximum amount you can borrow through a cash-out refinance.
While you don’t have control over the appraisal results, you can take steps to prepare your home to show at its best. Read on for a comprehensive guide on what to expect with a refinance appraisal, why it’s required, how you can get your home inspection-ready, and what to do if your home value comes in lower than anticipated.
What is a Refinance Appraisal?
A refinance appraisal is a valuation of your home conducted by a licensed appraiser on behalf of your mortgage lender. Appraisals estimate a property’s fair market value—the likely sale price if it were to be listed.
Refinance lenders order appraisals to confirm the home is worth enough to secure the new mortgage. The appraised value determines the maximum loan amount and whether private mortgage insurance (PMI) is required.
Appraisals provide third-party validation of the home’s value. Lenders want assurance that they are not lending more than the property is worth. Your home serves as collateral on the loan, so an accurate appraisal protects lenders from inflated valuations.
Why Do Lenders Require Appraisals for Refinancing?
There are several key reasons lenders order appraisals before approving a mortgage refinance:
- To verify the home’s current market value and set loan terms accordingly.
- To calculate the homeowner’s remaining equity and authorize a cash-out refinance amount.
- To assess the property’s condition and how it compares to the local real estate market.
- To confirm the home is adequate collateral to secure the new loan.
While appraisals are primarily for the lender’s benefit, they also give homeowners a snapshot of their home’s worth. If your home value has increased since purchasing, refinancing could allow you to tap into that added equity.
Are Appraisals Always Needed for Refinancing?
Most lenders require appraisals, but some refinance programs allow waiving the appraisal:
- FHA Streamline: Refinance FHA loans without an appraisal if you meet eligibility requirements.
- VA IRRRL: The VA Interest Rate Reduction Refinance Loan does not necessitate an appraisal.
- Portfolio Loans: Some lenders may waive appraisals for low-risk refinances held in their own portfolio.
Unless you qualify for one of these exceptions, plan on your lender ordering an appraisal. Conventional and government-backed refinances almost always involve appraisals.
What Does the Appraiser Look For?
The appraiser will assess both the interior and exterior of your home. They evaluate your property’s structure, layout, condition, amenities, and more.
Here are key factors the appraiser considers:
- Location: Desirability of the neighborhood, proximity to amenities.
- Lot size: Total land area.
- Home size: Square footage, bedroom/bathroom count.
- Condition: Overall maintenance and renovations are done.
- Kitchen/baths: Quality of finishes and appliances.
- Amenities: Garage, deck, pool, etc.
- Upgrades: Improvements that add value.
- Curb appeal: Landscaping, exterior condition.
The appraiser also researches recent comparable home sales in your neighborhood. This market data allows them to estimate your home’s value in relation to other area properties.
How Does the Appraisal Process Work?
The typical appraisal process involves these key steps:
1. Lender Orders Appraisal
After you apply to refinance, your lender will engage an appraisal management company (AMC) to assign an appraiser.
2. Appraiser Inspects Property
The appraiser will contact you to schedule a visit. They will evaluate your home’s interior and exterior condition.
3. Appraiser Analyzes Market Data
The appraiser researches comparable home sales in your neighborhood that occurred in the past 6 months.
4. Appraisal Report Submitted
The appraiser compiles their analysis, photos, and value estimate into a standard report for the lender.
5. Borrower Reviews and Appraisal
Federal law grants you the right to review the appraisal before closing. Verify that no factual errors impact the valuation.
6. Lender Reviews and Finalizes Loan Terms
The lender confirms the appraisal is sound and finalizes the loan amount, interest rate, and other terms based on your home’s value.
Appraisal Inspection Alternatives
Traditionally, appraisers conducted on-site inspections, but alternative inspection methods emerged in recent years:
- Desktop Appraisal: The appraiser relies solely on public records, MLS data, and aerial views without an in-person visit.
- Hybrid Appraisal: Combines desktop valuation with an exterior-only drive-by inspection.
- Exterior-Only Inspection: The appraiser performs a drive-by inspection, assessing only the home’s exterior.
These options gained popularity during the COVID-19 shutdowns. However, on-site interior inspections remain the most comprehensive method.
How to Prepare for a Refinance Appraisal
You can take steps to maximize your home’s appraised value by making it look its best:
- Clean and de-clutter to make the interior welcoming.
- Perform minor repairs, like fixing leaky faucets and squeaky hinges.
- Landscape the yard by mowing, raking leaves, and pruning plants.
- Open blinds and turn on lights to make rooms bright.
- Set HVAC to a comfortable temperature before the visit.
- Compile documents detailing home improvements made.
- Provide comparable sales to support your estimated value.
Preparing demonstrates pride in your home’s upkeep and allows the appraiser to focus purely on valuation.
What is the Cost of a Refinance Appraisal?
Appraisal fees are typically $300 to $500, depending on your property location and size. This cost is paid by the borrower as part of your closing costs.
The fee cannot be paid until closing but will show up on your final loan estimate. Select lenders may offer to cover appraisal fees or provide credits.
What if My Home Appraises Lower Than Expected?
A low appraisal can threaten your chances of an approved refinance. If your home value comes in lower than anticipated, here are some options to consider:
- Review the appraisal for any errors affecting valuation.
- Provide additional comps to challenge the low value.
- Ask for a second appraisal from a different appraiser.
- Pay for private mortgage insurance (PMI) to cover a low down payment.
- Bring cash to close to cover the difference between loan amount and appraised value.
- Renegotiate a smaller loan based on the appraised value.
- Apply with a new lender and restart the appraisal process.
The Importance of Appraisals in the Refinance Process
Refinance appraisals play a critical role for both lenders and borrowers. For lenders, the appraisal provides assurance that the loan is secured by adequate collateral – the home itself. By confirming the current property value, lenders can lend up to a certain percentage of that value while limiting risk. Appraisals are a prudent part of lenders’ due diligence.
For borrowers, appraisals unlock equity that may have built up in the home over time. With appreciation, homeowners gain equity they can tap into through cash-out refinancing. Appreciation can also allow refinancing at lower interest rates by demonstrating the home’s increased value. Additionally, appraisals give homeowners themselves an up-to-date picture of what their property is worth in the local real estate marketplace.
While not a requirement, appraisals remain a best practice for most mortgage refinances. By providing a professional valuation, they benefit lenders and borrowers alike throughout the refinancing process. Homeowners preparing to refinance should expect the lender to order an appraisal in most cases. Taking steps to make the home inspection-ready allows the appraisal to go smoothly while showcasing the property at its maximum value. With an accurate appraisal, borrowers gain assurance they are refinancing under optimal terms keyed to their home’s fair market value.
Questions Homeowners Frequently Ask About Refinance Appraisals
If you are new to the process, you likely have several questions about refinance appraisals. Here are answers to some commonly asked questions:
What’s the difference between an appraisal and a home inspection?
An appraisal estimates the property’s market value, while an inspection evaluates its physical condition and identifies any repairs needed. Inspections are recommended for buyers.
Why would I want an appraisal if I’m not selling?
The appraisal allows you to leverage your home equity through a cash-out refinance. It also ensures you receive optimal loan terms from the lender based on your current home value.
How long is an appraisal valid for refinancing?
Appraisals are valid for 120 days in most cases. If your refinance closes after this period, the lender may order an updated appraisal before final approval.
Who pays for the refinance appraisal?
The borrower pays the appraisal fee, but the cost is not due until closing as part of your total closing costs.
Can I use an online home valuation instead?
Lenders prefer appraisals done by licensed professionals. However, you can ask if automated valuation models are accepted.
What if my appraisal seems flawed?
Contact your loan officer immediately if you believe your appraisal contains factual errors affecting the valuation. You can provide additional evidence supporting a higher value.
In another related article, How to Refinance Your Mortgage: A Step-by-Step Guide