A multitude of factors come into play when homeowners contemplate refinancing their mortgage. But there's one factor that's often overlooked: The refinance appraisal. It's important to grasp the nuances of what a refinance appraisal entails, its significance and the ways in which it can influence the trajectory of a refinance.
What is a refinance appraisal?
A refinance appraisal involves the assessment of the current value of a property by a certified appraiser. The primary purpose of the appraisal is to determine the property's market value. By obtaining an updated and accurate valuation of the property, borrowers can potentially secure more favorable interest rates and terms, while lenders can mitigate their risk exposure.
Is a refinance appraisal necessary?
Most lenders require an appraisal when you refinance — not just when buying a new piece of property. That's because when you refinance your mortgage, you get a new loan on your existing property, so the lender needs an appraisal to determine your home's worth. However, your lender may waive this requirement if you've recently had an appraisal.
Appraisal waivers grant eligible buyers the option to bypass the appraisal process when purchasing or refinancing a home. That means you may be able to close on your refinance loan sooner, potentially getting you your new mortgage loan days or weeks faster.
Most homeowners don't qualify for an appraisal waiver. You'll need to meet several requirements, including having an excellent credit score, an eligible property and other borrower qualifications.
If you meet the requirements and decide to refinance without an appraisal, the data used to calculate your home's value might not be accurate. Your home could be worth less than you think (then, you'd have less equity than you realize), which could be an issue if you decide to sell.
Who pays for the appraisal?
The responsibility for covering the cost of a refinance appraisal typically falls on the homeowner. This fee is generally paid upfront or rolled into the closing cost of the refinance mortgage.
The average cost of a refinance appraisal can vary based on factors such as the location of the property, the complexity of the appraisal and the appraiser's fees. On average homeowners can expect to pay $500 for a single-family home.
How your home refinance appraisal affects your loan?
A home appraisal assesses the value of your home and also affects the amount you can borrow in a refinance. Mortgage lenders determine the terms of your refi loan based on the loan-to-value ratio (LTV).
The LTV is the amount you borrow in your refinance compared to the value of your current home. To calculate it, divide the loan amount by the appraisal value. For example, if your mortgage is $160,000 and your home is valued at $200,000, your LTV is 80%. That means you'll borrow 80% of what your home is worth.
Lenders decide maximum LTV on various refinance loans to balance risk. Check with your lender on the optimal LTV.
Preparing for the home refinance appraisal process
Your lender will arrange for the home appraiser to get in touch with you before their visit. While you don't need to go all out and stage your home for the appraiser like you would for a potential buyer, keeping your home clean and touched up is a good idea so you can put your best foot forward.
Appraisers usually make an appointment to conduct an in-person inspection of your home and property to assess:
Square footage and lot size
Number of bedrooms, bathrooms and fireplaces
Roofing, foundation, plumbing and HVAC quality
Upgrades to the original home
An appraisal also evaluates comparable homes in your area, meaning appraisers will analyze at least three recently closed sales to help estimate your home's value.
Preparing for a home appraisal not only puts your mind at ease, but it can also help you land a top valuation from the appraiser and hopefully favorable loan terms from your lender, too.