Mortgage appraisals

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Many homeowners want to refinance their home loans to take advantage of lower refinance mortgage rates. For example, a rate-and-term refi might allow you to lower your monthly payment or overall interest costs, while a cash-out refinance is an option for those who want to tap home equity for home improvement or other projects. Before a loan is approved, however, the lender may require a professional appraisal.

Refinance appraisals, which are an assessment of your property value, are a common part of the refinance process. Most lenders have a list of approved appraisers through their third-party partners, and the requirement to get an appraisal is usually determined by the lender, says Kristin Baker, chief of staff at White Oaks Wealth Advisors, who works with clients on structuring credit needs.

However, a refi appraisal isn’t always a must. Lenders sometimes take part in special programs that allow qualified homeowners to skip the appraisal process altogether, saving time and money.

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.

FHA no-appraisal streamline refinance

With an FHA-insured mortgage, you may be eligible for a streamline refinance that doesn’t require an appraisal and or extensive credit documentation and underwriting. To apply, you must be up-to-date on your payments and the refinance must result in a new FHA loan that provides you with a “tangible benefit” — which could be a better interest rate or a shorter term, though the FHA defines the benefit in various ways depending on the type of loan you have. If you want a streamlined cash-out refinance, the amount taken out can’t exceed $500.

VA no-appraisal streamline refinance

Veterans and family members with VA loans aren’t required to get an appraisal or go through credit underwriting to apply for a VA Interest Rate Reduction Refinance Loan (IRRRL), which is VA’s version of a streamline refinance. An IRRRL can’t be used for a cash-out refinancing. Closing costs can sometimes be rolled into a new loan so you avoid out-of-pocket costs at the time of closing.

Should qualified borrowers skip the refi appraisal?

If you’re eligible to forgo a refi appraisal, should you take a pass or get one anyway?

Some homeowners may not need an appraisal, but they could find it’s in their best interest to do so anyway, especially if they believe their home value has increased. “If…the borrower wishes to see what the maximum cash they can get is, it might be necessary to go with a full appraisal,” says Baker.

An accurate appraisal could prevent the bank from basing the loan on a too-low amount. If the appraisal comes back with a higher valuation, you might be able to get more cash out in a refinancing, or get a better interest rate based on the new loan-to-value ratio.

“Many refinances require appraisals that are ordered by the lender. 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,” says Julienne Joseph, assistant director of government housing programs at the Mortgage Bankers Association.

Here are some of the pros and cons of getting your home appraised.

Pros of mortgage appraisals

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

1. 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.

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 professional appraisal can help determine whether the loan-to-value ratio is sufficient to avoid PMI.

2. Secure a lower interest rate. Refinance rates are dependent on the value of your home, so if an appraisal shows that your home has increased in worth, you may be eligible for a lower refi rate than you anticipated.

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.

3. Better chance for approval. Homeowners not eligible for a streamline program, such as the FHA or VA option, may find that an appraisal that reflects an acceptable loan-to-value ratio may be the only way to get a new loan approved.

Cons of mortgage appraisals

On the other hand, appraisal drawbacks that experts say homeowners need to recognize include:

1. Cost. Appraisals can cost $500 or more, according to Baker. This can be expensive for homeowners who are trying to refinance to lower their monthly payments.

2. Low property valuation. There’s a chance that a refi appraisal could determine that your home is worth significantly less than you or your lender anticipated. This may be the case in neighborhoods that have undergone a rash of short sales and/or foreclosures. A dip in the value of homes can definitely affect refinance rates.

“A lower-than-expected appraisal can result in a restructuring of your refinance or perhaps, not being able to refinance at all,” says Baker.

To avoid unhappy surprises, it’s best to do some online research on your home value or consider asking a local real estate agent to do a market analysis of your home. You can get a reasonably good estimate by entering your address at one of the popular real estate websites, that can provide a starting point for your refinancing deliberations.

What about appraisal websites?

“The websites that supply valuations have come a long way in their algorithms and do give you a ballpark estimate of what you can realistically expect for an appraisal,” says Baker.

When getting an appraisal, there’s no need to stage the home, but all areas of the home should be accessible. The appraiser will look at the total square footage, number of rooms, qualify of construction and the useful remaining life of the home, but won’t take into consideration your furnishings or current consumer preferences, says Baker.

Typically the homeowner doesn’t need to provide the appraiser with any input. The appraiser is focused primarily on the objective characteristics of the home and real estate transaction data, says Joseph.

As long as you’re realistic about your home valuation, many U.S. housing markets have rebounded to the point that you likely have options available to restructure your existing mortgage or take on some new debt to do a home renovation project.

Have you decided to take advantage of today’s low refinance rates? Weigh the pros and cons before ordering a refinance appraisal.

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