Published October 10, 2011
Many homeowners want to refinance their home loans in order to take advantage of lower mortgage rates. Before a loan is approved, however, the borrower likely will be asked to order a professional appraisal to assess the value of the property.
Even though appraisals are common, not everyone needs one to refinance a home, says Carolyn Warren, author of the book "Homebuyers Beware." That's because lenders sometimes participate in plans that allow eligible homeowners to skip the independent valuation, she says.
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.
"With the FHA streamline refinance program, if you have a current FHA loan and you're refinancing into another FHA loan, you want to lower your monthly payment, and your previous payments have been made on time, then no appraisal is called for," Warren says.
Some homeowners may not need to hire an appraiser, but they could find it's in their best interest to do so anyway. That's particularly true if the home likely is worth more than what the lender states, says Jennifer Creech, president of InHouse, an appraisal management and technology company in Orange, Calif.
An accurate appraisal could prevent the bank from basing the loan on a too-low amount, she says.
"If there is a higher valuation after the owner gets the home appraised, there may be more refinancing products available based on the new loan-to-value ratio," Creech says.
When borrowers are considering refinancing their mortgages, they should always look at the pros and cons of appraisals, says Creech.
Experts say some of the pros of a mortgage appraisal include the following:
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, Warren says.
But if the actual market price of the property is higher than what the lender assumes, and the loan is less than 80% of the home's true value, the borrower may not have to pay for PMI. A good way to determine if the loan-to-value ratio is low enough to avoid PMI is to order an appraisal, Creech says.
Capture a lower interest rate. 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.
Better chance for approval. Homeowners not eligible for a streamline program, such as the FHA or VA option, may find that ordering an appraisal (that reflects an acceptable loan-to-value ratio) may be the only way to get a new loan approved, Warren says.
"If you can qualify for a regular refinance, you don't want to lose the opportunity to save money and get a lower rate," she says.
Spot rising trends. While many people look to real estate agents to identify when a market rebounds, professional appraisers have that ability, too, says Austin Robbins, a real estate agent in Marietta, Ga.
"If the appraiser is familiar with the area, they should be able to spot a rising trend in prices and document it in the appraisal," Robbins says.
Professional appraisers are expected to have geographic competence -- meaning they should be knowledgeable about the communities where they conduct appraisals, he says.
On the other hand, appraisal drawbacks that experts say homeowners need to recognize include:
Cost. According to Creech, appraisals cost around $400. This can be an expensive price to pay for homeowners who are trying to refinance and lower their monthly payments, she says.
Low valuations. An appraisal may find a home's value is significantly lower than what the homeowner (and lender) anticipated. Robbins says a large drop in price can occur if the home's neighborhood has had recent short sales and foreclosures, where homes were purchased at below-normal rates.
"The value can fluctuate quickly," he says.
Warren says a price decline would likely affect the refinance options available to the borrower.
"If the value is lower than the maximum loan-to-value that your lender allows, you probably won't get to refinance after all," she says.
To avoid surprises, Warren suggests contacting a professional who can offer an idea of what a home is worth. It's best to do this before starting the refinancing process.
"If you're curious about what the value of your property is, ask a real estate agent to do a market analysis and tell you," Warren says.