Pros and cons of mortgage refinance appraisals

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Depending on your lender, you may be required to have a professional appraisal of your home before your mortgage refinance is approved. An appraisal tells you and your lender the market value of your property.

“Many refinances require appraisals that are ordered by the lender,” says Julienne Joseph, assistant director of Government Housing Programs at the Mortgage Bankers Association. “A borrower can have an appraisal done outside the transaction, but it would only be for informational purposes and could not be used in the approval process.”

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.

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.

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.

How to prepare for a mortgage refinance appraisal

If your lender requires an appraisal and you are worried about having someone in your home during the pandemic, don’t worry.

“Appraisers who can still perform inspections have become very savvy at adapting inspections. They are very willing to adhere to inspection measures to make the homeowner feel safe,” Desmarais says.

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.”

If you are refinancing and the lender requires an interior inspection, Desmarais says to talk with the appraiser about the protocols you will follow. “Some of the most common things borrowers can do is to turn on all the lights and open all doors so the appraiser can avoid touching surfaces, and to conduct all relevant conversations via email or phone so the appraiser can spend as little time as possible in the home.”

While some appraisers may use borrower-provided photos or even conduct video conferences with the homeowners, lenders do not always allow these “virtual inspections” to replace an interior inspection by the appraiser.

“Virtual inspections may be used to gather data about a home, but the lender is the only one who decides if an interior inspection must be completed,” Desmarais says.

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.”

Featured image by H. Armstrong Roberts of ClassicStock/Getty Images.

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