Why the Home Appraisal Matters When You’re Refinancing

If you think back to purchasing your home, you likely remember having the property appraised. Now that you’re refinancing the mortgage, you’ll need to undergo a second appraisal. Refinancing replaces an existing mortgage with a new one. Different reasons justify a refinance.

For example, you might apply for a new mortgage to get a lower interest rate and lower your mortgage payment.

Or you might refinance to switch to a different mortgage product or to pull cash from your equity.

Of course, a mortgage refinance isn’t always guaranteed. The reality is your home’s appraised value can make or break the deal.

What Is a Home Appraisal?

If you apply for mortgage financing through a bank or credit union, the bank will order a home appraisal before clearing you to close.

The purpose:

A home appraisal is to determine your property’s value.

As a general rule of thumb, a mortgage lender will not lend more than a home’s value. Since refinancing creates a new loan, your lender must confirm that your home’s current value is equivalent to or greater than the amount of the new loan.

Appraisals also matter when you’re pulling cash from your equity. This process is known as a cash-out refinance.

Basically, your mortgage lender allows you to borrow up to 80 percent to 85 percent of your home’s equity.

In such a scenario, an appraisal is required to know exactly how much equity you have.

You can then use the cash for just about any purpose. This includes debt consolidation, home improvements, college tuition, a wedding, and so forth.

The more equity you have, the more cash you can borrow from your equity.

But this isn’t free money.

Mortgage lenders add the borrowed amount to your mortgage balance.

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Even though your mortgage lender orders the appraisal, the appraiser works for a third-party company. The process is relatively short, taking less than an hour in many cases.

The appraiser walks through your home, takes note of its condition, and then uses comparable sales for the neighborhood to determine the property’s worth.

Comparable sales refer to recently sold homes in the neighborhood, as well as homes currently on the market.

Your home’s overall condition along with sales prices and recently sold prices provide a fairly accurate estimate of your home’s value.

How Much Does a Home Appraisal Cost?

Home appraisals aren’t free, and as the homeowner, you’re responsible for this expense.

On average, home appraisals cost between $300 and $400. The price can be higher for homes with larger square footage.

You don’t pay the appraiser directly on the date of your appraisal.

Rather, your mortgage lender includes the cost of the appraisal with your closing costs.

Closing costs refer to lender and third-party fees associated with a mortgage transaction.

This usually includes:

• mortgage origination fee
• title search fee
• attorney fee
• discount points
• prepaid expenses

When refinancing a mortgage, closing costs range between 2 percent and 5 percent of the loan balance.

If you don’t have enough cash in reserves, some lenders will allow you to wrap closing costs into the new mortgage.

To do this, however, the mortgage balance with closing costs included cannot exceed the property’s value.

Some lenders even have promotions where they’ll pay a borrower’s closing costs.

Keep in mind:

In this situation, you’ll also pay a higher mortgage rate to compensate.

Steps for Improving a Home’s Appraised Value

Since your property’s appraised value determines whether you’re able to refinance, it’s important that you understand ways to improve your home’s worth.

Home improvement projects with the highest rate of return can result in a higher value.

These projects include kitchen and bathroom remodels, new doors and windows, new flooring, and room additions.

If you’ve already applied for a refinancing, there probably isn’t time to complete a major remodeling project before the appraiser arrives.

Even so, you can take steps to prepare your home so that it appraises higher.

1. Fix broken items

Broken items and visible signs of wear and tear can lower a home’s value.

Prior to the appraisal:

Walk around your house and make a note of anything that needs repairing.

This might include a broken light switch, broken cabinet doors, a small hole in the wall, or a running toilet.

It also doesn’t hurt to touch-up worn paint on the walls or repaint a room that has a lot of handprints or smudges on the walls.

This gives your home a fresh look, and it may appear newer and cleaner.

2. Boost your curb appeal

Your home’s landscaping is the first thing the appraiser sees when driving up to your property.

So, spend some time before the appraisal cleaning up the yard.

Cut the grass, pull weeds, and pour new mulch. Or, spruce up your outdoor space with new flowers, shrubbery, or river rocks. Replace any broken or outdated lighting. And if you have time, paint your front door and shutters, and powerwash the exterior to remove dirt and mildew.

3. Clean your interior

A clean house will appraise higher, so make sure you give your home a deep cleaning before the appraisal.

Shampoo your carpet, declutter, wipe down walls, dust baseboards, and window sills, and tidy up before the appraiser arrives.

4. Highlight features of your home

Don’t be afraid to brag about your home during the appraisal.

If you recently made updates or improvements, bring these to the appraiser’s attention. This might include installing new hardwood flooring, new energy-efficient windows, etc.

This doesn’t suggest following the appraiser from room to room. Give them space, or else they may think that you’re trying to hide something.

What If the Appraisal Is Lower Than Expected?

But even if you take the above measures to boost your home’s value, the appraisal might come back lower than expected and jeopardize your refinance.

Get a second opinion

Don’t immediately give up on the idea of refinancing your home.

When the appraised value comes back lower than anticipated, ask your lender for a copy of the appraisal report.

This way, you can see which property’s the appraiser used for comparable sales.

Read the report carefully and pay attention to the appraiser’s notes. Upon closer examination, you may find that the appraiser understated the square footage of your home or the number of bedrooms and bathrooms.

Now:

Wrong information of this nature can have a negative impact on a home’s appraised value.

If you feel that the appraiser used outdated data, or that the appraiser wasn’t familiar with your neighborhood or area, ask your lender for a second opinion.

A second opinion is at your expense again. But it’s worth the cost if the second appraisal comes back higher, putting your refinancing efforts back on schedule.

Pay the difference out-of-pocket

You can still proceed with refinancing if a second opinion doesn’t change the appraised value.

Just know:

You’ll have to pay the difference between the appraised value and the loan amount out-of-pocket.

So if you’re attempting to refinance for $210,000, yet the property only appraises for $207,000, you’ll have to pay an extra $3,000 at closing to make up the difference.

Ask about alternative refinancing options

Another option is to see whether you qualify for the Home Affordable Refinance Program.

Also known as HARP, this program is designed specifically to help borrowers with little to no equity refinance their mortgages.

The downside is that your loan must be owned by Fannie Mae or Freddie Mac to qualify.

HARP is set to expire on December 31, 2018.

If you have a VA home loan, talk to your lender to see if you qualify for a streamlined interest rate reduction refinance loan. You might be able to refinance your home lone without an appraisal.

Wait it out and refinance later

If all else fails, your only other option is to stick with your current home loan and wait until you have enough equity. This happens gradually as you pay down your mortgage and as your home appreciates.

Just because you’re unable to refinance today doesn’t mean you can’t in the future.

Wait one or two years and then re-apply.

In the meantime, look into updating or improving your property to increase your equity.

You might even consider making extra home loan payments. Paying down your mortgage balance — which builds equity — will make it easier to refinance down the road.

Conclusion

A home appraisal is critical when applying for a new purchase mortgage and a refinance.

Unfortunately, your lender will not approve your application if your loan amount will be more than your home’s value.

But while a low appraisal can throw a wrench in your plans, it doesn’t signal the end.

Worst case scenario:

You’ll have to postpone refinancing for a couple of years. Sometimes, however, appraisers make mistake.

So, don’t hesitate to ask for a copy of your appraisal report.

And don’t be afraid to request a second opinion if you feel your property didn’t receive a fair evaluation.