When you refinance your mortgage, your lender will likely have a professional evaluate your home’s value. The results of the evaluation can impact new loans, including determining whether you need to pay private mortgage insurance (PMI). Knowing what to expect from an appraisal can help you navigate the refinance process with more confidence.
What is a refinance evaluation?
A refinance evaluation is often part of the underwriting process when refinancing your current mortgage into a new mortgage. Similar to the appraisal done when you first purchase your home, a refinance appraisal evaluates the condition of the property and compares it to similar homes in the neighborhood to determine its value. The refinancing process can be more streamlined, especially if you’re working with the same financial institution.
Why do lenders require a home appraisal for refinancing?
Lenders typically require a home appraisal before approving a mortgage refinance. This is because it helps us assess the value and condition of the home to ensure that the loan makes financial sense.
Evaluation serves several purposes.
- Check the value of your home: The appraisal evaluates the current value of your home and ensures that lenders do not offer more than the property is worth, as it acts as collateral in the event that your home defaults on your loan.
- Assess property condition: The appraisal also provides lenders with a snapshot of how well the home has been maintained and how it compares to similar properties in the area.
- Measuring housing equity: Your equity (the difference between your home’s appraised value and your loan balance) determines how much cash you can take out with a cash-out refinance. It also determines whether you need to pay PMI.
What factors do refinance appraisers consider?
Several aspects of your home will be analyzed by the appraiser to estimate its current market value.
- position: The appraiser will consider your home’s proximity to schools, parks, shopping, and other amenities. We also evaluate recent sales of similar homes in your area.
- size: Evaluate the square footage and lot area of your home, as well as the number of bedrooms and bathrooms.
- Interior system: The appraiser will evaluate the plumbing, heating/AC, electrical, and other major home systems.
- exterior: Garages, decks, porches, pools, landscaping, and general curb appeal are also considered.
- home improvement: Updating key areas like the kitchen, bathroom, and roof can increase the value of your home. If you’re refinancing with the same lender or appraiser, they may pay special attention to any changes or upgrades made since your original loan.
How the evaluation process works
Refinance evaluations typically occur early in the lending process. Timelines vary by lender, but typically take a few days to complete and follow these basic steps:
- Once your refinance application is initiated, your lender will commission an appraisal from an independent licensed professional to evaluate your home’s current value.
- An appraiser will contact you and arrange a time to visit the property in person. In most cases, you can visit in person.
- The appraiser will evaluate both the interior and exterior of the home during the visit. A physical inspection typically takes anywhere from 20 minutes to several hours, depending on the size and complexity of the property.
- The appraiser will also look at recent comparable sales in your area, known as “comps” in real estate jargon.
- Finally, the appraiser will prepare a report estimating your home’s market value, which will be sent to your lender.
Refinance evaluation and purchase evaluation
Refinance and purchase evaluations follow a similar process, but differ in a few important ways.
- Purchase appraisal: These rely on the agreed sale price of the house as a reference point. The appraiser uses that number as a benchmark. The renters are not present for them because the house is not yet theirs.
- Refinance evaluation: These do not have sales contracts to guide their valuation. Instead, appraisers determine the value of your home based entirely on factors such as compensation, property condition, and current market trends. Borrowers are usually able to witness the refinance appraisal and can point out any upgrades or repairs that may support a higher appraisal.
What Refinance Appraisal Means
A home’s appraised value helps determine its equity, loan terms, and whether you can move forward with refinancing.
- If the valuation is as expected, As a result of the appraisal, it is confirmed that the property in question is sufficient collateral for the loan amount, and it is possible to proceed with the loan without making any major changes.
- If the appraised value is higher than expected: If you get a higher-than-expected appraisal, you may have more flexibility to refinance. You may be eligible for a better interest rate based on your increased capital. If you’re paying PMI and the appraisal puts your equity above 20%, you may be able to reduce that cost. Higher values may also allow you to borrow more through a cash-out refinance.
- If the appraised value is lower than expected: If your rating is low, your lender may reduce your loan amount, require PMI, or deny you a refinance.
What to do if the appraised value of your home is low
If you disagree with the appraised value and think it should go higher, you have a few options.
- Check the report for errors. Inspect it carefully to ensure it accurately reflects the features and condition of your home.
- Submit value for review. If you find any inaccuracies or better coverage, you can ask the lender to dispute the appraisal by providing supporting evidence.
- Request a second evaluation. Some financial institutions allow second opinions (but you’ll have to pay for them yourself).
- Adjust your refinance strategy. If your rating is low and your options are limited, you may need to adjust your loan amount or switch to a different loan type.
- Start over: If you are not satisfied with the results, you can always choose another financial institution and start anew in hopes of a more favorable outcome.
How much does a refinance appraisal cost?
The cost of refinance appraisal varies depending on the size, condition, location, etc. of the home. According to HomeAdvisor, a typical home appraisal costs between $314 and $424, with the average being $358.
Appraisal fees are typically included in the closing costs paid by mortgage borrowers, but in some cases they may be included in the loan instead.