Home Appraisals For Refinance: A Guide For Homeowners

Refinancing your home loan can be a good way of lowering your monthly payments, reducing your interest rate or borrowing against the equity you’ve built up in the home.

Many people might be surprised to learn that refinancing – meaning replacing your current mortgage with a new one – has a similar process to buying a home in the first place.

Onqwfe of the most important steps of the refinance process is the appraisal. It can help determine whether you qualify to refinance, can take money out of the home and whether you’ll have to continue paying private mortgage insurance (PMI).

What Is A Refinance Appraisal?

A refinance appraisal is a professional estimate of the value of your home. During the appraisal process, a third-party appraiser assesses your home and compares it to similar, recently sold homes in the area to give their professional opinion of how much it’s worth.

The home appraisal process probably sounds familiar to you because you would have had one when you purchased your home. When you’re applying for a mortgage, lenders usually require an appraisal to make sure the amount they’re lending you is appropriate based on the appraised value of the home. It also helps determine whether your offer and down payment fit within the lender's loan-to-value ratio (LTV) requirements.

Refinance appraisals play a similar role. In most cases, lenders are only willing to refinance your home if you meet their LTV requirements. Additionally, if you’re planning a cash-out refinance, an appraisal can tell the lender how much you should be allowed to take from the home in cash.

Even if you bought the home in recent years, refinance appraisals are still important. They can indicate whether the home has appreciated or depreciated – and by how much – since you bought it.

Types Of Appraisals For Refinancing

There are several basic types of appraisals used in refinancing, each of which has a slightly different process and may be appropriate for different situations. The four types of appraisals listed below are alternatives to a more in-depth appraisal where a professional visits the home to physically – and carefully – assess it.

Hybrid

A hybrid appraisal is one that’s done using the information provided by third-party sources. The person doing this type of appraisal doesn’t have to physically visit your home, though they may request pictures or hire an inspector.

Desktop

A desktop appraisal is another one where the appraiser doesn’t actually visit your home. This type of appraisal is similar to the hybrid approach, but the appraiser doesn’t rely on any information from third parties. Instead, they use information that’s already readily available from the property records and comparable listings.

Drive-By

A drive-by appraisal requires that an appraiser visit the home but not go inside. Instead, the appraiser can simply drive past the home to look at its exterior.

No-Appraisal

Refinancing usually requires an appraisal, but there could be some exceptions, including those for certain government-backed loans.

Do You Need An Appraisal To Refinance?

An appraisal is almost always a refinance requirement, especially if you have a conventional loan or are refinancing to a conventional loan.

The appraisal may be inconvenient, but it helps protect both you and the lender. It ensures the lender isn’t loaning you more money than the home is worth (or more than its maximum LTV). An appraisal can tell the lender if your home has depreciated, either because of the current housing market or because of neglect of the home. Unfortunately, it could also show that you’re underwater on your loan, meaning you owe more than the home is worth. If that’s the case, you won’t qualify for a refinance.

The appraisal also protects you as the borrower. First, if you’re currently paying PMI on your loan, an appraisal can tell you and the lender if you’ve reached 20% equity in the home, meaning you’ll no longer be on the hook for PMI payments.

A refinance appraisal is especially important in the case of a cash-out refinance. When you do a cash-out refinance, you borrow some of your equity from the home. The amount you can take out depends on the equity you have – which depends on the appraised value of the home.

Ultimately, the type of refinance loan you’re applying for will determine whether an appraisal is necessary and which type of appraisal is needed. While conventional loans usually require an appraisal, certain government-backed loans, including FHA loans and VA loans, can be refinanced without appraisals.

What Do Appraisers Look For In A Refinance?

The goal of an appraisal is to estimate the fair market value of the home. The appraiser does this by looking at the condition and characteristics of the home and comparing those to other homes in the area.

First, the appraiser will look at your home’s basic specifications, including the square footage, number of bedrooms and number of bathrooms. They’ll also look to see if there’s any damage to the home or anything that threatens the safety of the home. Finally, the appraiser will look to see what upgrades and improvements you’ve made to the property, which can increase the value of the home from its previous appraisal.

Once the appraiser has gathered relevant information about your home, it will look at comparable homes that have recently sold, as well as their sale price. Looking at the market value of similar homes is what ultimately helps determine the value of yours.

What Happens If A House Appraises For Less Than Expected?

Your home appraising for less than you expected may not be a huge problem. If you have a large amount of equity in your home and simply want to refinance to lower your interest rate or monthly payment, you might have no problem qualifying and meeting those goals.

Where it becomes more difficult is if you don’t have much equity in the home. A low appraisal could prevent you from refinancing altogether since you may no longer meet the lender’s LTV requirements. In that case, the amount you’re approved for may not be enough to pay off your current loan.

A low appraisal could also be a problem if you were hoping to drop PMI from your monthly payments. If the appraisal comes back low and you have less than 20% equity in the home, you’ll need to continue to pay PMI.

Finally, a low appraisal could be a problem if you were hoping to do a cash-out refinance. Even if you qualify for a normal refinance loan, you may not have enough equity to borrow from or enough to borrow the amount you wanted.

How To Prepare For A Refinance Appraisal

There are a few things you can do before your refinance appraisal to help the process go smoothly and maybe even improve the results.

The first thing to do is to make sure you understand the type of appraisal you’re having. As we discussed, not all appraisals require someone to visit your home in person. Some may be done virtually, with only a drive-by visit or with no visit at all.

If there will be an appraiser visiting your home, make sure to take steps to improve both the curb appeal and aesthetic appeal of the home. For example, take time to complete any home maintenance tasks that have been on your list, as well as work on exterior projects to make the outside of your home look nicer.

It’s also important to make sure the interior of your home looks nice and is clean and clear of clutter. No, clutter may not reduce the market value of your home. But it can provide a distraction to the appraiser, making it more difficult for them to focus on the things that really matter.

You’ll want to bring to the appraiser’s attention anything you’ve done to increase the market value of your home. Have you made any additions to your home? Completed any renovations? Make sure your appraiser pays attention to those things.

Finally, you may want to spend some time looking at comparables in your area and researching home value beforehand. This step can help you avoid any unwelcome surprises for your own appraisal.

The Bottom Line: A Home Appraisal For Refinancing Will Influence Your New Loan

An appraisal is an important step in the refinancing process, protecting both borrower and lender and helping determine what size loan you qualify for.

Before you can get to the refinance appraisal, you’ll first have to shop around and apply for the loan. If you’re ready to get started, apply for a refinance with our friends at Rocket Mortgage^Ⓡ today.