Need a home refinance appraisal? Your top questions answered
Dec. 1, 2020 • 4 min read
What we'll cover
Refinance tips and terms
How to calculate loan-to-value ratio
A home appraisal checklist
Headlines about low interest rates may entice you to apply to refinance your house, but did you know a home appraisal is key to getting the interest rate you want? A home refinance appraisal determines your property’s current market value, and in turn, influences the terms of your new loan.
Read on to learn how this important step determines how much you ultimately pay for your house.
Why do you need an appraisal with a home refinance?
Most lenders require an appraisal when you refinance, not just when you buy a new piece of property. That’s because when you refinance your mortgage, you’re essentially getting a new loan on your existing property.
Your lender needs an appraisal to determine how much your home is currently worth, so they know how much they can reasonably lend. If you’ve recently had an appraisal done, you may be able to ask that your lender waive this requirement.
What is an appraisal waiver?
When refinancing your home, you could have the opportunity to receive an appraisal waiver. This means you can get a new mortgage loan without having an appraisal done on your property. With an appraisal waiver, your lender will likely use analytics and data to put a valuation on your home.
Fannie Mae determines which refinance borrowers qualify for an appraisal waiver, and it should be noted that the majority of homeowners do not receive one. There are a number of requirements, including having an excellent credit score, refinancing an eligible type of property, and meeting other borrowing qualifications.
Should I consider refinancing with an appraisal waiver?
One of the biggest benefits of an appraisal waiver is eliminating the appraisal charge from your refinancing closing costs, which could save you $450 to $650. An appraisal waiver could allow you to close on your refinance loan faster, too — potentially getting you your new mortgage loan days or even weeks faster.
That sounds great, but it’s important to note that if you decide to refinance without an appraisal, the data used to calculate your home’s value might not be accurate. Meaning that your home could be worth less than you think (and thus, you have less equity in it than you realize), which could be an issue if you decide to sell.
How your home refinance appraisal affects your loan
Because a home appraisal assesses the value of your home, it 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, or LTV.
The LTV is the amount you’re borrowing in your refinance compared to the value of your current home. To calculate LTV, simply 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’re borrowing 80% of what your home is worth.
Lenders decide what their maximum LTV is on various types of refinance loans to balance their risk. Although an 80% LTV is the sweet spot for most mortgage lenders, you may be able to refinance with an LTV of up to 95% or more with a VA loan, FHA loan, or Ally’s HomeReady program.
That loan-to-value number is especially important if you’re looking to do a cash-out refinance, because the lender’s maximum LTV determines how much equity you can pull out of your home. For example, if your home appraises for $350,000 and you owe $200,000, you have $150,000 in equity. If you were to refinance at an 80% LTV, you’d be able to borrow $280,000 on your home and potentially “cash out” up to $80,000 for home repairs, tuition, or other expenses. If your home appraised for less than that, you’d have less equity to pull out.
The home refinance appraisal process
Your lender will hire an independent home appraiser familiar with your area to assess the property’s current value (this fee will be part of your closing costs). Sometimes the appraiser will do what’s known as a “desktop appraisal,” where all the research is done without entering your home.
More often, the appraiser will make an appointment to conduct an in-person inspection of your home and property. They’ll assess various aspects, including:
Square footage of the home and size of the lot
Number of bedrooms, bathrooms and fireplaces
Quality of roofing, foundation, plumbing and HVAC
Condition of sprinkler system and quality of landscaping
Built-ins and upgrades to the original home
Overall condition of the house
An appraisal also includes an evaluation of comparable homes in your area. That usually means appraisers have analyzed at least three recently closed sales to help them arrive at the best estimate of your home’s value.
How to prepare for a home appraisal
Your lender will make arrangements for the home appraiser to get in touch with you prior to 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, it’s a good idea to have your home clean and touched up, so you can put its best foot forward. In particular:
Your home appraisal checklist
Look for damage and make needed repairs, like loose railings, plugged or leaky gutters, and missing shingles. If your home is well-maintained, it shows.
Make note of any improvements and home renovations you’ve made to the property and be sure to share them with your appraiser. That new deck, remodeled kitchen, or roof replacement could have a positive impact on the valuation.
Give your yard some extra love. Weed flowerbeds, mow and trim the lawn, remove dead leaves and trees, and make sure walkways are clear. Never underestimate the power of curb appeal. You want your entire property to appear nicely maintained.
Do your own comparables. Recent home sales in your area are a matter of public record, and there are a number of apps and websites you can use to find that information. Knowing what homes are going for in your area can help you get an idea of what to expect when your appraisal comes back. You can also ask the appraiser what helps increase home values in the area most, since they’re the experts in your market.
Being prepared for what to expect during a home appraisal not only puts your mind at ease, it can help you land a top valuation from the appraiser — and hopefully favorable loan terms from your lender, too.