refinance

Pros and cons of refinance appraisals

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Highlights
  • Some borrowers can skip appraisals when refinancing a home loan.
  • Appraisals can help some borrowers get a lower rate and avoid PMI.
  • Sometimes, appraisals hurt a homeowner's chances of refi approval.

Many homeowners want to refinance their home loans in order to take advantage of lower mortgage rates. Before a loan is approved, however, the borrower likely will be asked to order a professional appraisal to assess the value of the property.

Even though appraisals are common, not everyone needs one to refinance a home, says Carolyn Warren, author of the book "Homebuyers Beware." That's because lenders sometimes participate in plans that allow eligible homeowners to skip the independent valuation, she says.

For example, the Federal Housing Administration and the Department of Veterans Affairs offer streamline refinance programs that don't require eligible borrowers to get property appraisals.

"With the FHA streamline refinance program, if you have a current FHA loan and you're refinancing into another FHA loan, you want to lower your monthly payment, and your previous payments have been made on time, then no appraisal is called for," Warren says.

Some homeowners may not need to hire an appraiser, but they could find it's in their best interest to do so anyway. That's particularly true if the home likely is worth more than what the lender states, says Jennifer Creech, president of InHouse, an appraisal management and technology company in Orange, Calif.

An accurate appraisal could prevent the bank from basing the loan on a too-low amount, she says.

"If there is a higher valuation after the owner gets the home appraised, there may be more refinancing products available based on the new loan-to-value ratio," Creech says.

When borrowers are considering refinancing their mortgages, they should always look at the pros and cons of appraisals, says Creech.

Pros of mortgage appraisals

Experts say some of the pros of a mortgage appraisal include the following:

Potentially avoid PMI. If the terms of a borrower's existing loan require private mortgage insurance, chances are it would be required after a refinance too, Warren says.

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But if the actual market price of the property is higher than what the lender assumes, and the loan is less than 80 percent of the home's true value, the borrower may not have to pay for PMI. A good way to determine if the loan-to-value ratio is low enough to avoid PMI is to order an appraisal, Creech says.

Capture a lower interest rate. If the loan-to-value ratio is too high, the lender may charge the borrower a higher mortgage rate to reflect greater risk. However, if an appraisal shows the loan is a much smaller percentage of the home's value, the borrower may receive a lower interest rate, which could lower the monthly payment.

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