Refinancing Your Home
When interest rates are lower or you want to take advantage of more favorable mortgage terms, it may be time to refinance. But when you refinance, just about everything is dependent on the home appraisal. Why is this? It ensures that the mortgage lender does not lend more money than the property is worth. Also, if the appraisal means that the equity in your home becomes less than 20%, you may not be allowed to refinance, or you may need to buy private mortgage insurance. Finally, if you do end up with less equity, you may not get the interest rate you want.
Therefore, if you have been thinking about refinancing, you need to understand the role of the home appraisal in the process.
What Is a Home Appraisal?
An appraisal is a determination of the value of a home, conducted by a licensed and qualified professional. The lender may request the appraisal via a third-party called the appraisal mortgage company, or use an in-house appraiser. Regardless, the appraiser needs to be unbiased to ensure that the calculation of the home’s value is accurate and fair. The borrower needs to pay for the service upfront.
During the process, the appraiser will:
Although you do not need to have the dishes washed or rugs vacuumed, ideally, having your home in the top condition possible is in your best interest.
The appraiser will also study records of properties that similar to yours to help determine the current value of your home. In turn, your mortgage lender will use the appraisal, along with your credit history, income, and debts, to determine how much money they will lend to you.
What Happens if the Appraisal is Low?
If you find that the home appraisal is too low, you may not be allowed to refinance.
However, you do have the option of appealing the appraisal to obtain a second opinion. Unless you can demonstrate that some crucial factor, such as an incorrect square footage calculation or wrong room count, was missed or inaccurate, the likelihood of getting a second appraisal that is significantly different from the first is remote.
If you are unable to challenge a low appraisal, then what is your next step in refinancing? If the new appraisal means you have less than 80% equity – meaning that you would need to pay for private mortgage insurance – you have the option of a cash-in refinance to get to the needed 80% loan-to-value ratio and avoid that insurance.
If you have funds available at the moment, you can also choose to pay for private insurance. If home values rise, you can show comparable sales to your mortgage lender and request to remove your mortgage insurance.
Finally, if the appraisal indicates that you are underwater, you can either wait for the housing market to improve or apply for a government assistance program, such as the Home Affordable Refinance Program (HARP), which helps home owners who are underwater to refinance their mortgages.
The Bottom Line
Understanding how a home appraisal works will help you get the best chance of success. Remember that an appraisal may not be at the value you want. Make sure your home always remains in great structural shape, and your refinancing could be as easy as pie.