How appraisal refinancing works
When mortgage rates drop, refinancing a mortgage is a popular way for homeowners to save money on what is often their biggest expense: interest on a home loan. But before they can get approved for that lower rate, most times, borrowers need an appraisal of their home to refinance.
Why is an appraisal important? It influences the percentage of your interest rate – and thus your potential savings. For lenders, it gives confidence that they are not loaning you too much money for a house that’s worth significantly less than the mortgage – for example, giving a $300,000 loan on a house worth only $250,000 is not in their best interest. Refinance appraisals reduce risk for lenders. That’s why they are the ones who order them; one ordered by a borrower may be helpful as a guide but would not be included in the approval process of a loan.
Even before signing up for an appraisal, it’s important to see if refinancing makes sense for you. A refinancing calculator will help you decide if refinancing your home loan is a good idea for you and your finances. Then, you will need to submit paperwork to the lender who, save for a few federal programs addressed below, will want to know your debt-to-income ratio, your credit score and your percentage of your home equity. The lender will assign an appraisal once the paperwork is approved.
Here are eight tips to help you understand the facts on a refinance appraisal, how it compares to a purchase appraisal and when you can skip it altogether.
What are the best ways to prepare for a refinance appraisal?
Because they’re often out of sight, many homeowners forget to check their HVAC, electrical and water heater to make sure they’re all operating smoothly. The proper functioning of these systems is significant to an appraiser. Make sure to check that each faucet is turning on and off suitably. Double check that light switches work.
What happens during a refinance appraisal?
Part of the process occurs away from your home. The appraiser will check the sales price of comparable homes in the past six months to get a sense of the value.
Once inside your house, the list is long for what an appraiser may check for. In fact, the visit can last an hour. Top items he or she will assess include (starting from the bottom):
- The home size
- Number of bedrooms and bathrooms
- Basement status
- Roof status (if possible)
- Recent updates
Is a refinance appraisal the same as a purchase appraisal?
There is no difference in how the appraiser assess value on a purchase or a refinance of a home. However, homeowners dealing with a refinance appraisal get a big benefit compared to purchase appraisal – they can attend it, which means they can point out improvements the appraiser may have overlooked and even share their own research on home values in the area with the appraiser.
Can you refinance without an appraisal?
Federal home loans sometimes do not require an appraisal to refinance. For example, the U.S. Department of Veteran Affairs (VA), the U.S. Department of Agriculture USDA) and the Federal Housing Administration (FHA) offer interest rate reduction refinance loans (IRRRLs) – also referred to as streamlined refinance – that involve no appraisal refinance. Because these programs often skip common loan procedures, such as a credit check, they are considered some of the easiest to be approved for.
Is it smart to skip an appraisal?
An appraisal waiver during refinance is not always the best move. Though the appraisal adds time and money (see below) to the refinancing process, it could alleviate the need for private mortgage insurance (PMI). This insurance clicks in if the value of your home since you procured your original loan has gotten to a point that the mortgage is more than 80 percent of the home’s worth. And be warned: PMI is expensive. It can cost up to 1 percent of your entire loan, or $1,000 for each $100,000 in mortgage. And it is no longer tax-deductible.
On the flip side, if you already have PMI and the refinance appraiser discovers your loan is 80 percent or less of the home’s appraised value, you may be eligible to shed costly private mortgage insurance if you have a conventional mortgage.
What is the cost of the appraisal?
The third-party appraiser generally charges between $300-$500 for the work, however, jumbo appraisal start at $650. Factors that influence the final bill are the complexity of the home, the number of units and the required turn time for the report.
Can you dispute the appraisal?
Appraisers are human, and they can easily make mistakes. There are numerous issues that could render an appraisal “flawed”. If they write down a smaller number for your square footage than is accurate, that is a simple fix that can help your refinancing rate. They may have mistaken the age of an important improvement. Make sure to examine the appraisal closely.
A second appraisal is permitted if the Lender has reason to be believe the initial appraisal is materially “flawed”. You may also submit additional comparable sales to send to the appraiser for a Reconsideration of Value.
Is the appraisal the last step of the refinance process?
Usually but not always. The appraiser can add “subject to” flags. These can include the presence of mold, termites or other factors that the homeowner must address before the loan can be approved, which will obviously cost the homeowner money to fix.
Appraisal refinancing can take time out of your busy schedule. But a successful appraisal could potentially lead to a lower mortgage rate, which means more money in your pocket in the long run.*
*Savings, if any, vary based on consumer’s credit profile, interest rate availability, and other factors. Contact Guaranteed Rate, Inc. for current rates. Restrictions apply. Guaranteed Rate, Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the US Department of Agriculture or any other government agency.