Key takeaways

  • An appraisal for a refinance is part of the underwriting process for a new loan. Appraisers look at various factors, including your home's location and its size, layout and improvements.
  • Many lenders will not approve a loan without an appraisal.
  • Appraisals can also help you secure a lower interest rate and increase your odds of approval.

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 determining whether you need to pay for private mortgage insurance (PMI).

What is a refinance appraisal?

Key terms

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.

Why do lenders require home appraisals for a refinance?

The appraisal allows the lender to confirm your home’s current value. This information is important because a lender does not want to loan more than your home is worth, as the home serves as collateral for the loan. If for some reason you’re unable to repay the loan, the lender can opt to foreclose on the home and sell it to recover its funds. Thus, knowing your home’s value helps the lender know how much of a loan to offer.

In cases where you’re seeking to tap into your home’s equity as part of the refinance process, a cash-out refinance appraisal helps more clearly define how much equity you have in your home.

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,” says Ann Thompson, retired specialty lending executive for Bank of America. She further says 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. Some of the key benefits and requirements of these programs include:

  • FHA streamline refinances offer what’s known as a “tangible benefit” in the form of a lower interest rate, a change of loan terms or a switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
  • When using an FHA streamline refinance, you’re unable to withdraw more than $500, and your mortgage must be in good standing.
  • The VA-backed streamline refinance is known as an Interest Rate Reduction Refinance Loan (IRRRL).
  • The IRRRL typically offers a lower interest rate and can provide reduced monthly payments.
  • It is also possible to switch from an ARM to a fixed-rate mortgage with an IRRRL.

What factors do refinance appraisers consider?

When reviewing a home, whether it’s for a refinance or a new purchase, appraisers will focus on 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 sizes and amenities. They will also look at how close your home is 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. The number of bedrooms and bathrooms will also have an impact.
  • Layout and functionality. Your appraiser may also consider whether your home’s layout 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. An appraiser will also evaluate decks, porches and garages.
  • 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 refinance 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,” says Lisa Desmarais, vice president of Appraisal Issues at the Appraisal Foundation, a professional association of real estate appraisers. “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.”

Here are a few steps you can take to prepare for your refinance appraisal:

  1. Clean up. Your appraiser will likely want to view your home’s interior and exterior, so make sure to clean up both the yard and the inside. Even something as simple as dusting and cleaning up clutter can make your home look more appealing.
  2. Add lighting. Before the appraiser arrives, open the window shades and turn on the lights to make your home seem bright and inviting.
  3. Adjust the temperature. Be sure to set the heating or cooling at a reasonable temperature to make sure the interior is comfortable.

How much does a refinance appraisal cost and who pays for it?

Appraisal fees are included in the closing costs a borrower pays. The median cost of a house appraisal is $500, according to a 2022 survey by the National Association of Realtors. However, the tab can depend on your home’s size, location and uniqueness. You may have to pay for an appraisal upfront, but you may also be able to roll this expense into the loan and include it in your closing costs.

The cost of the appraisal falls on the borrower to pay. However, you do not need to pay this cost until you close on the loan. It will be among the closing fees you’ll need to pay.

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).

FAQ about refinance appraisals

  • The purpose of an appraisal is solely to assess the market value of the home. A home inspection evaluates the property’s condition, including its safety and the functionality of its systems, such as plumbing, electricity, heating and more. An inspector carefully reviews the property to uncover any hidden issues, as well as more obvious ones. An inspector does not offer any assessment of a home’s market value.
  • Many lenders require a mortgage appraisal; without one, your new loan won’t be approved. In addition, if your home’s current market value is higher than what the lender assumes and you end up with a loan that’s less than 80 percent of the home’s value, you’d be able to avoid PMI. This is because you would now have 20 percent equity in the home.

    In addition, refinancing when your home value increases can work in your favor. If the appraisal shows your home value has gone up, you may be eligible for a lower interest rate or be able to get more cash out in a refinance. Finally, if your home value has increased, it can increase your chances of getting approved for the refinance.
  • During an in-person appraisal, the appraiser will determine the fair market value of your home. This will involve inspecting the home both inside and out. The assessor’s goal is to review the condition of the property and gather information about its size and features. If you want, you may be home while the appraiser conducts their assessment.

    There are other types of home appraisals in addition to in-person refinance appraisals. There is a desktop appraisal, which uses online information like property records, floor plans and comparable listings, and a hybrid appraisal that combines an in-person and online approach. You may also have a drive-by appraisal where the appraiser simply assesses the property’s exterior. This is an option typically seen with Federal Housing Administration (FHA) refinances and Department of Veterans Affairs (VA) refinances.
  • After the refinance appraisal, you move on to the underwriting process. This is when the lender reviews your application materials to confirm that everything has been completed and submitted properly. Based on this information, the lender will either approve or deny your application. If your application is incomplete or incorrect, you may be given conditional approval. Once you are approved, you can proceed to closing on the loan.
  • An appraisal website collects data about your home and interprets it using mathematical calculations via an algorithm. However, this is not always accepted by all lenders for refinancing, as a website won’t be as nuanced as a person who can factor in more details about your home and the neighborhood.