Refinance appraisals: What to expect depending on your current mortgage
Quick insights
- Refinancing your mortgage can be financially beneficial when current interest rates are lower than your existing rate.
- A home appraisal is usually required for a refinance process because a current loan-to-value (LTV) ratio helps mortgage lenders determine the terms they’ll offer.
- Although the appraisal details can vary, the home’s condition (inside and out), along with recent local sales, influence the property value.
Refinancing a mortgage can have financial benefits for many homeowners. Potential savings depend significantly on the current loan details, property and new loan terms. Appraisals can be conducted differently; however, most lenders require one when a homeowner applies for refinancing.
What is a refinance appraisal?
In real estate, a refinance appraisal is a professional assessment of a property’s current market value. The appraisal is usually required because it ensures the property value will support a new loan amount. The appraisal would happen after you apply to refinance a mortgage and help determine the terms a lender offers.
What factors do appraisers consider?
Appraisers consider several specific factors when evaluating a property's overall condition and comparable sales in your area. These include:
- Property condition: Both the interior and exterior of a home are typically reviewed, including the quality of any construction or repairs.
- Location: Local market trends, particularly recent sales, influence property values. These comparisons help to gauge the current market value of a home.
- Size: The square footage and number of rooms are important factors. In general, the more space and greater number of rooms a home has, the greater the value.
- Improvements: Renovations and upgrades to the property, such as a new kitchen or energy-efficient features, can increase property value.
Do I always need an appraisal to refinance?
In most cases, yes, but lenders may offer refinancing without an appraisal. This mostly depends on the lender, loan type and situation. In general, lenders want to manage risks when they lend money; requiring (or not requiring) an appraisal to refinance a mortgage is every lender’s choice. Lenders have different qualification criteria for mortgage refinancing, and the differences can extend to the applicant and property in question.
Refinancing options that might not require an appraisal
- VA interest rate reduction refinance loan (IRRRL): This can refinance an existing VA loan to a lower rate or refinance an adjustable-rate mortgage (ARM) to a fixed-rate. Besides an existing VA loan, borrowers need to meet additional requirements to qualify and refinance without an appraisal.
- FHA Streamline Refinance: Available through FHA-approved lenders, this refinancing option for qualified borrowers waives the appraisal during underwriting. You could qualify for better loan terms, such as a lower rate, with an FHA Streamline Refinance.
Why do lenders require home appraisals for a refinance?
This is typically to ensure that property’s value can cover the current loan principal. In a mortgage refinance, the current loan is paid off in place of a new one. Ensuring a home is worth at least as much as the loan being offered helps mortgage lenders manage risk. The property value will also help determine the LTV ratio, one of several factors that lenders use to determine refinance terms.
How to prepare for a refi appraisal
Home appraisers tend to review interior and exterior elements, so here are some tips to help you ahead of the appraisal:
- Clean: Tidying up can help appraisers navigate and evaluate the interior or outside of a home. Appraisers may need to measure rooms and take a close look at recent improvements, for example.
- Repair: Consider making any obvious repairs or addressing maintenance issues, such as damaged flooring or leaky pipes.
- Document upgrades: A list of any improvements you’ve made since the last appraisal (perhaps the home purchase) can help ensure the refi appraisal is comprehensive.
- Enhance curb appeal: When homes appear well maintained from the outside, the perceived value can increase. People view landscaping, paint and other cosmetic enhancements favorably. The more attractive a home is, the greater the potential value.
In summary
Refinancing a mortgage can be a strategic financial decision for homeowners. Each lender’s process and qualification criteria varies, but the home usually must be appraised before the refi is completed. Lenders may approach refinance appraisals differently, but the home’s condition is typically reviewed closely. Along with the home itself, comparable home sales are frequently factored in the appraised value.
A current property value can impact the refinancing terms a lender would offer to homeowners. These terms are important to understand when deciding if a mortgage refinance is right for you.
