Pros and Cons of Mortgage Refinance Appraisal

With interest rates on home loans at historic lows, a lot of current homeowners may be considering refinancing. Refinancing can help you lower your monthly payments, take advantage of better rates, get out from under mortgage insurance or change the repayment terms of your loan.

Depending on the type of refi you’re considering, though, you may learn that your lender requires a mortgage appraisal to refinance your loan. But is this appraisal any different than the home appraisal you got when you bought your home? Are there any pros and cons to getting a mortgage appraisal completed?

What is a mortgage refinance appraisal?

An appraisal is when a third-party professional comes to look at your home and property to assess the value. The appraiser looks at the condition of your home, the upgrades you’ve made, data on the local real estate market and anything else that could affect the value of your home.

If you’re researching refinancing, chances are you already own your home. When you purchased your home, the bank or lender had an appraisal conducted on the home. The purpose of that home appraisal was to ensure you aren’t trying to borrow more money than the home is actually worth.

[ More: How to Offset the New Mortgage Refinance Fees ]

When you refinance your home loan, you are effectively taking out a new loan on the same property you already own. And while the property is the same to you, it’s brand new to your new lender. For that reason, that lender needs to make sure that the property value matches up with the money they’re planning on lending you.  This process is known as a mortgage refinance appraisal.

It’s important to point out that a home appraisal is different than a home inspection. During the home appraisal, the appraiser will inspect your home and take major damage into account. However, the only reason they’re doing this is to determine the true value of your property.

How to qualify for a mortgage refinance appraisal

The decision to get a mortgage appraisal during the refinancing process usually is not yours to make. Most top lenders require the appraisal to protect their financial interests. Remember, your home is the collateral that backs your mortgage. If you ever default on your loan, the lender can take the home to recoup their lost money. If the home isn’t worth what you owe on it, the lender may find itself out a considerable chunk of change.

There are a few types of mortgage refinancing that don’t require you to get a home appraisal. Neither VA streamline refinancing, FHA streamline refinancing or USDA streamline refinancing require it, as long as you meet the additional criteria to forego the appraisal process.

Benefits of getting a refinance appraisal

While you may not be excited about getting another appraisal, there are quite a few benefits that may come from the process, including:

• Avoid private mortgage insurance. On most conventional loans, you’re required to pay private mortgage insurance (PMI) if you have a loan to value (LTV) ratio of 80% or higher. If your home is appraised for a higher amount than when you purchased it, your LTV may drop below 80%, which could get the PMI removed. For example, let’s say that your home was appraised at $200,000 when you purchased it, and you currently owe $170,000 on the loan. Your LTV is 85%, which qualifies you to pay PMI. Let’s say that during the refinancing process, your home is appraised higher at $250,000 because of property value increases in your area. This drops your LTV to 68%, which would allow you to stop paying PMI.
• Lower interest rate. Your interest rate on your loan is determined by a whole host of different factors. One of these factors is your LTV. The higher your LTV, the riskier your loan is in the eyes of the lender. If your appraisal brings this factor down, you may be able to cash in on a much better than expected interest rate.
• You get approved. The biggest benefit of a mortgage refinance appraisal is that it may be necessary to get approval for your refinancing. If your new lender requires it, then it has to be done to close the deal.

Drawbacks of getting a refinance appraisal

Unfortunately, there may be some unintended consequences that come from getting a home appraisal during the refinancing process.

• A higher LTV. As mentioned, a higher appraisal can help to lower your LTV, which can set you up for a better interest rate. However, just as your home could be appraised higher, it could also be appraised lower. When this happens, your LTV may increase. This could result in a higher than expected interest rate. Even worse, it could outpace the maximum LTV the lender is comfortable with, which would mean your refinancing wouldn’t be approved.
• It costs money. Home appraisers don’t work for free. The average cost of a home appraisal is generally somewhere between $300 and $400. Even if you get your home appraised and aren’t approved for refinancing — or you choose not to go through with the process — you still have to pay this fee. When your whole goal is saving money, this could be a less than ideal outcome.
• It takes time. When you’re looking to refinance, you want the best results from your appraisal. This means you’ll want to take time to clean up your home, handle any major repairs that are necessary and finish any value-adding upgrades that are in the works. While all of this should pay off, it does take time.

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