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.

How much does a refinance appraisal cost?

Appraisal fees are included in closing costs paid by the borrower. While appraisal fees ranged between $300 and $450 before the pandemic, a shortage of appraisers has driven up costs. Your cost might be $600 or more. The tab can depend on the size, location and uniqueness of your home. You may have to pay for an appraisal up front, but you may also be able to roll this expense into the loan and include it in your closing costs.

Benefits of getting an appraisal for refinance

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,” says 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: The current market value of your home may be higher than what the lender assumes, in which case you’ll 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: If an appraisal shows that your home value has increased, you may be eligible for a lower interest rate or be able to get more cash out in a refinancing. Factors will include your credit score and debt-to-income ratio.
  • Have a 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. A high appraisal reduces the lender’s risk. If you don’t get an appraisal, the lender may assume that you represent a higher risk than you do and deny your application.

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.

  • Location. This is one of the most important factors. An appraiser will evaluate things like the recent sale prices for nearby homes with similar size and amenities. They will also look at the proximity of your home to desirable community attractions like parks and stores.
  • Size. The available square footage of your home will also play a big part in your appraisal. So will the number of bedrooms and bathrooms.
  • Layout and functionality. Your appraiser may also consider whether the layout of your home is modern or obsolete. Better functionality could increase home value.
  • Home improvements. You can also get a more favorable appraisal if you’ve made improvements to important rooms like the kitchen and bathrooms. Any updates that bring the home closer to today’s standards will help. This also includes roof replacement.
  • Exterior amenities. An appraisal considers both internal and external conditions. Decks, porches, and garages will also be evaluated.
  • Condition of home systems. Any issues with plumbing, heating, electrical, or other major home systems can affect the overall home appraisal.

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 to do if your home appraisal is low

Getting a low property valuation could hurt your chances of a successful refinance. Even if you have a great credit score, if a lender thinks you don’t have a lot of equity in the property, they may deny the refinance. A home with a low appraisal represents a higher risk for the lender because you could end up underwater on the new mortgage.

If you get a low appraisal, there are a few things you can do. First, check the appraisal report for any errors. Maybe the appraiser didn’t realize you’ve upgraded your HVAC system or they forgot to list one of your bathrooms. You can also request a second opinion. If those measures don’t work, consider requesting a cash-out refinance instead of a full refinance or agreeing to private mortgage insurance (PMI).

FAQs about refinance appraisals

  • No. If you are refinancing an FHA or VA loan, you may not need to get an appraisal. These loans have streamlined refinance options that allow borrowers to forgo the appraisal process. For conventional loans, mortgage giants Fannie Mae and Freddie Mac have increased the number of properties that qualify for appraisal waivers.
  • Home value estimate websites create valuations that are calculated in a very different way from that of an appraiser. An appraisal website collects data about your home and interprets it using mathematical calculations via an algorithm. A website won’t be as nuanced as a person, who can factor in more details about your home and the neighborhood.