If you’re dreaming of a cash out refinance or getting into a home loan with better rates or a shorter term, you may be in luck! Interest rates have been near historic lows for quite a while now, and lots of options may be available for homeowners with a history of on-time payments and homes in good condition.
But what about that pesky appraisal? There are a few refinance options that may not require it, but getting an appraisal could have surprising benefits.
Keep in mind that a refinance is basically a new home loan. Getting one may not be quite as difficult as buying a new home, but lenders still need to make sure they’re making a good investment. Cue the appraisal.
Overview: what is an appraisal?
Let’s get down and dirty with the definition. An appraisal is an official way to determine the fair market value of your property. In other words, it’s a way for an expert to estimate how much your home would sell for if you put it on the market today.
Your home’s value is used to determine things like your LTV (loan-to-value ratio), your potential equity, and how much cash you might be able to get out. But more on that later.
How home appraisals work
If the home loan you choose requires an appraisal, your Loan Officer will put in an order for an appraisal with an Appraisal Management Company (AMC). The AMC randomly assigns an appraiser in order to keep everything fair and unbiased from your lender's perspective.
Next, the appraiser will contact you to make an appointment. When the big day arrives, you'll be able to show your appraiser around the property and explain any upgrades you’ve made since you bought it.
The appraiser will look at your home’s condition inside and out and take note of the layout, number of bedrooms and bathrooms, and the condition of systems such as plumbing, heating, and air conditioning (among other things). If health and safety is a concern, an exterior-only appraisal may be allowed.
Back in the office, the appraiser will create a report using your property information and other comparable properties (comps) that have recently sold in the area to determine your home's value. When they're done, they'll send a final report to your lender.
If you get an appraisal, you’ll most likely pay the AMC directly. The cost is usually between $300 and $500 (and sorry, you can't shop for rates).
Reasons to consider an appraisal
If you’re a homeowner, you might be thinking of the downsides of an appraisal. Beyond the cost, there’s the issue of scheduling—and no one likes having a nosy stranger in their home. Plus, what if the appraiser doesn’t agree with what you think your home is worth?
These challenges are real, but keep in mind that refinance loans with appraisals often have lower interest rates and better terms than no-appraisal refinance loans. Appraisals can also mean more options for getting cash out. To put it plainly, paying a few hundred dollars for an appraisal now could save you thousands in the future.
Appraisal and remodeling
Remodeling a kitchen or bathroom, upgrading windows, or replacing your roof has the potential to increase the value of your home. It makes sense, then, that getting an appraisal before you complete the remodel/upgrades wouldn’t necessarily reflect the value—or potential value—you see in your home.
Fortunately, there is a solution.
Certain loan programs may allow you to refinance your mortgage and pay for home improvement at the same time. Your appraisal would be based on expected value once the work is completed. If you qualify for one of these programs, you could make improvements AND take advantage of low interest rates.
A little more about home value
Homes in nearly every state and region have increased in value in recent years, so there's a good chance your home is worth more than you paid for it. The only way to know for sure, though, is to order an appraisal.
What could an increase in your home’s value mean for you? If you are currently paying mortgage insurance (MI) because your LTV is greater than 80% or you have an FHA loan, an increase in your home’s value would reduce your LTV. If that magic number falls below 80%, you may be able to eliminate MI, and that would save you a chunk of change every month. Lower LTVs can also mean lower rates and better terms, but keep in mind that every situation is unique.
No-appraisal refinance options
You’ll need to talk to a mortgage pro to find out if you may be eligible, but we put together a quick list of no-appraisal refinance programs and requirements to help you decide:
Fannie Mae loans: If you have a home loan backed by Fannie Mae, you may be able to waive the appraisal if your property meets certain guidelines.
Freddie Mac loans: If your original loan was backed by Freddie Mac, you may be able to waive the appraisal in some circumstances.
FHA home loans: If your original loan was backed by the FHA, you may be eligible for a streamline FHA refinance to get into a lower rate. You may even be able to skip the credit check!
VA home loans: If you already have a VA loan, getting a refinance may be relatively straightforward. These refinance loans are known officially as Interest Rate Reduction Refinance Loans (IRRRL). And that pretty much spells it out—they’re for helping active duty troops and veterans get into lower rates, not for cash out or reinvestment.
USDA loans: If you are in a USDA loan, there's good news. The USDA streamlined-assist program may let you skip both the credit check and the appraisal if you’ve made payments on time for the last 12 months. But wait, there's more! Your DTI (debt-to-income ratio) may not be a factor.
Refinance as an investment
If you’re hoping to lower your rate, skipping the appraisal may make sense. If you’re hoping to use your equity for something like education, retirement, or reinvestment, you will probably need an appraisal.
A knowledgeable Loan Officer licensed in your area can help you get everything sorted out. Get in touch whenever you’re ready!