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Mortgage refinance appraisals: Pros and cons

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Single Family New Construction Home in Suburb Neighborhood
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When you’re refinancing your mortgage, your lender may want to have a professional appraise your home to determine its market value. The result of the appraisal can have an impact on your new loan, such as by determining whether you need to pay for private mortgage insurance (PMI).

What is a refinance appraisal?

A refinance appraisal is a home appraisal that happens as part of the underwriting process for getting a new loan. Your lender can order an appraisal to determine your home’s market value and ensure it is worth enough to secure your new loan.

The appraisal can help the lender learn about the value of homes in your neighborhood as well as how you’ve maintained the property.

Pros of a refinance appraisal

Many lenders require a mortgage appraisal; without one, your new loan won’t be approved.

“Appraisers study your home, and apply precise and individual attention to the property,” explains Lisa Desmarais, vice president of Appraisal Issues at the Appraisal Institute, a professional association of real estate appraisers.

In addition to securing your loan, there are other benefits to an appraisal for you as a borrower.

Potentially avoid PMI

If you currently pay private mortgage insurance (PMI), you will most likely need to pay it even after you refinance.

However, the current market value of your home may be higher than what the lender assumes. If that’s the case, you may end up with a loan that is less than 80 percent of the home’s true value. You would then be able to avoid PMI since you have 20 percent equity in your home.

Secure a lower interest rate

With mortgage rates so low, many borrowers are looking to refinance. Your rate will depend on several factors, including your credit score and debt-to-income ratio.

Refinance rates are also dependent on the value of your home. If an appraisal shows that your home value has increased, you may be eligible for an even better interest rate than anticipated, or be able to get more cash out in a refinancing.

Better chance of approval

If you’re on the cusp of qualifying for a refinance, getting an appraisal can help your chances, especially if your home’s value has increased.

For example, if your home initially appraised for $250,000 when you got a mortgage and you’re trying to refinance $175,000 of your debt, a lender will feel more secure in offering the loan to someone with less than perfect credit if the property is now worth $300,000 because it reduces their risk.

Cons of a refinance appraisal

While the decision to have an appraisal is up to the lender, there are a few ways it can impact your refinance plans.

Time and money

The timing of your closing, and how much it costs, will be impacted by the appraisal.

Depending on when the appraisal is scheduled, your closing may take longer than you’d like. With the pandemic, however, the government is allowing some appraisals to be deferred up to 120 days after closing. Desmarais cautions that this only applies to a small group of transactions. Ask your lender for details.

Appraisal fees are included in closing costs paid by the borrower. These fees can range between $300 and $450 or more and can depend on the size and location of your home.

Low property valuation

Just as an appraisal showing an increase in home value can help you get a better interest rate, a valuation that is less than what your lender anticipated can hurt those chances.

If the appraisal shows that your house is worth significantly less, your loan may be restructured, or you may not be able to refinance at all. Even if you are approved, you might wind up having to pay private mortgage insurance, which boosts your monthly payment.

Do I always need an appraisal to refinance?

Not all refinances require an appraisal; the decision, however, is entirely up to the lender.

Bank of America, for example, requires a refinance appraisal “to accurately assess the value of the property and the risk of the transaction,” according to Ann Thompson, head of Retail Sales, West, for Bank of America. She further explains that appraisals “provide independent validation of other critical information such as occupancy, completion, condo project information, and health and safety.”

The Federal Housing Administration and the Department of Veterans Affairs, however, do offer streamline refinance programs that don’t require eligible borrowers to get property appraisals.

FHA streamline refinance

If you are looking to refinance your FHA-insured mortgage, you may not need an appraisal. An FHA streamline refinance results in what is called a “tangible benefit” — a lower interest rate, a change in loan terms or a switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. You can’t take out more than $500, and your mortgage must be in good standing, but the lender is not required to order an appraisal.

VA streamline refinance

VA-backed loans have a similar streamline refinance option called an Interest Rate Reduction Refinance Loan (IRRRL). As the name implies, with this option, you may be able to get a lower rate and reduce your monthly payment; you can also switch from an ARM to a fixed-rate mortgage. An appraisal is not required, and closing costs can be rolled into the new loan.

What do appraisers look for when refinancing?

When appraising a home, whether it’s for a refinance or a new purchase, appraisers look at a few factors.

One of the most important factors is location. Recent sales prices for similar, nearby homes will serve as a good starting point for an appraisal. The safety of your neighborhood and its proximity to desirable things like transit or parks can also increase its value.

Your home’s size also has an impact. In general, the larger a home, the more it will be worth.

If you’re refinancing with the same bank and appraiser as your initial mortgage, the appraiser may pay closer attention to things like home improvements and maintenance. A new coat of paint and other improvements can help you land a higher appraised value.

How to prepare for a mortgage refinance appraisal

To secure the highest possible appraisal, it’s important to take steps to get your home ready to show off.

Most people — appraisers included — look favorably on a clean and well-maintained home. But before you start painting walls or mulching your yard, speak with your appraiser.

“A homeowner can ask the appraiser what would help them the most when they are at the property,” Desmarais says. “Because every property is unique to its own market, only the appraiser who is coming to the property will be able to best advise how the homeowner can prepare for the appraiser’s visit.”

Your appraiser will likely want to view the interior and exterior of your home, so make sure to clean up both the yard and inside. Even something as simple as dusting and cleaning up clutter can make your home look more appealing.

Before the appraiser arrives, open window shades and turn on the lights to make your home seem bright and inviting. Also adjust the heating or cooling to make sure the interior is comfortable.

Be realistic about your home valuation, and don’t be afraid to talk to your lender and the appraiser.

What about appraisal websites?

There’s no harm in entering your address in one of the various real estate databases found online, but know that these home value estimates are calculated in a very different way from that of an appraiser.

As Desmarais explains it, these websites “collect data and offer interpretations of that data. … They are mathematical calculations based on algorithms.” Appraisers research and analyze the property and then “apply the data that best fits. … Websites cannot account for the details and nuances that impact individual properties.”

While the estimate you see online may be interesting to see, Desmarais says that “if a property owner wants to know the market value of their property — and not a broad, generalized estimate — they need to have an appraisal completed.”

Written by
Diane Costagliola
Contributing writer
Diane Costagliola is a contributing writer for Bankrate. Diane writes about homebuying, loans and personal finance.
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