Refinancing your mortgage is a financially savvy move. It gives you a fresh start by saving a good amount of money on interest rates and monthly payments and even lets you pay your mortgage faster. However, the success of your refinancing heavily relies on a critical component: the home appraisal.
The home appraisal is an impartial and professional opinion on your home’s fair market value so you can effectively go through refinancing transactions.
If you are a borrower looking to refinance their home, you will want to understand how the home appraisal process works and how it can help you in successful refinancing. Read this blog as we help you navigate the process of home appraisals seamlessly.
How Does the Home Appraisal Process Work?
When you choose to refinance your mortgage, a home appraisal is a part of the underwriting process to secure a new loan. The lender appoints a licensed home appraiser to determine your home’s value and see if it is worth the loan you are requesting. The home appraiser acts independently, ensuring no biases from the lender or borrower’s side.
To create the comprehensive appraisal report, the appraisers visit your home and look for the following main factors:
1. Home Condition
The home appraiser will look at the home’s general condition, like the number of rooms, absence of safety hazards, and functioning of your plumbing, electrical, and heating systems. Their main aim is to ensure the house is habitable and free from any dangers that can cause damage to life and property. If your home is deemed unfit in the report, the appraisal value can be much lower than expected.
2. Home Improvements
If you have made some renovations in your home of a permanent nature, they are considered favorable in getting a higher appraisal. These include roof replacement, kitchen and bathroom renovations, landscaping your pool, or repairing your garage and basement. These updates should be at level with today’s standards if you want better results.
An appraiser will also consider the sale prices of properties with similar sizes and amenities near your location. They will thoroughly evaluate the prices at which these properties were sold and their current value. Further, an appraiser will want to know the proximity of your home to neighborhood attractions like stores and parks to determine the right dollar value of your home.
During the walk-through of your home, the appraiser will take various photos for record and then create a detailed report based on the findings. This report will contain the appraised value of your home, factors that influenced the valuation, and a list of comparable property sales that affected the valuation.
According to a survey by the National Association of Realtors in 2022, the average cost of home appraisal is around $500. These fees are included in the borrower’s closing costs. However, the amount can change as per the factors influencing your home valuation, like size and location.
Why Do Home Appraisals Matter?
Home appraisals for refinancing matter to both lenders and borrowers in the following way:
Home appraisals help lenders determine the true value of your home so that they won’t loan you more than your home’s worth. Since your home serves as collateral, they want to ensure that they can foreclose your home and retrieve their funds in case you are unable to pay the money on time.
A home appraisal allows borrowers to know the worth of their home and understand if they can actually refinance their mortgage. If you want to refinance a conventional loan, it is almost impossible with a low appraisal. In that case, the appraisal report will highlight the areas that need improvements, and you can renovate your home accordingly.
On the other hand, a favorable appraisal allows you to negotiate better loan terms with the lender by securing lower interest rates and decreased monthly payments. Further, you can access your home’s equity through a cash-out refinance. This enables you to use your equity for other purposes like home renovations, medical and educational fees, or debt consolidation.
Do All Loans Require an Appraisal?
Not all loans require a formal appraisal during the refinancing process. The necessity for an appraisal depends on various factors, including the type of loan and the lender’s policies. Here’s a breakdown of when appraisals are typically required and when they might not be necessary:
1. Conventional Loans
In the case of conventional loans, a home appraisal process cannot be skipped as lenders wish to assess the value of your home. However, you can have alternatives to home appraisal in the following forms:
- Value Acceptance: The lender uses the existing database about the home to reach an estimated value. This value is accepted without any confirmation by conducting a home appraisal.
- Value Acceptance and Property Data: This approach skips the appraisal process. However, a professional is hired to collect the property data by assessing the interior and exterior of the house.
- Hybrid Approach: This is a collaboration with a professional property data collector and home appraiser.
2. VA Loans
Veterans Affairs (VA) loans may require an appraisal, but in some cases, a VA streamline refinance, also known as an Interest Rate Reduction Refinance Loan (IRRRL), may not require a new appraisal. This loan typically offers lower interest rates and reduced monthly payments.
3. FHA Loans
The Federal Housing Administration offers streamlined refinances that save eligible borrowers from home appraisal processes. These offer tangible benefits to the borrowers concerning lower interest rates, changes in loan terms, and switching from ARM and fixed-rate mortgages.
To summarize, a successful refinance starts with a favorable home appraisal. It protects both you and the lender from potential financial overextension and, in turn, reduces the risk associated with refinancing. Thus, with a home appraisal that accurately reflects value, you can secure a loan that maximizes benefits.
At Bond Street Mortgage, we have built an excellent reputation as a mortgage lending firm that serves all client needs of real estate professionals, builders, and individual home buyers. Our mortgage advisors will help you find the best loan with terms and costs that meet your requirements. Get in touch with us and explore various refinancing options.