Occasionally, homeowners consider refinancing a mortgage during their homeownership journey. Whether it’s to secure a lower interest rate, reduce monthly payments, tap into home equity or change the terms of the loan, refinancing can offer a multitude of benefits. Yet, the importance of appraisals in the refinancing process is frequently underestimated. In this blog, we’ll explore the significance of a refinance appraisal, when it’s needed and the common types of home appraisals used.
What Does a Refinance Appraisal Do?
A home appraisal is a thorough assessment of the current value of your home. This market value assessment serves multiple purposes during the refinance process.
- Loan-to-value ratio: The loan-to-value ratio (LTV) is the ratio of the loan amount to the property’s appraised value. It matters when determining the risk of the mortgage refinance. A lower LTV signifies more equity in the property, which is seen as less risky to the lender. A higher LTV can lead to a higher interest rate or more stringent loan terms.
- Risk mitigation: Lenders use a mortgage refinance appraisal to minimize their risk. The appraisal for a refinance helps them establish a reasonable expectation of how much they can recoup should they sell the home if the borrower defaults on the loan.
- Compliance: Many regulatory and lending guidelines require an appraisal report for refinancing, particularly when the loan is to be sold in the secondary mortgage market. Appraisals help lenders comply with these regulations and ensure that the loan meets industry standards.
- Loan approval and terms: Appraisals can influence the type of loan a homeowner qualifies for. If the appraisal reveals that the home’s value is high, homeowners may be eligible for more favorable loan options, such as a lower interest rate or a jumbo loan. Conversely, if an appraisal comes in low, it may limit the loan options available to the homeowner.
- Asset verification: Lenders want to make sure that the property they are financing is real, in the condition described by the borrower and has no undisclosed issues that might affect its value. The appraisal process serves as an essential tool for verifying these aspects.
- Quality control: Appraisals help maintain the quality of the lender’s loan portfolio. If a mortgage lender relies solely on a borrower’s estimation to determine how much the home is worth, it could lead to loans with inflated values, increasing the risk of default.
Are Appraisals Always Needed to Refinance?
An appraisal is not always required for mortgage refinancing, but this depends on several factors, including the type of refinance, the LTV and the lender’s policies. Here are some common scenarios in which an appraisal may or may not be necessary for refinancing:
- Rate and term refinance: A rate and term refinance in which the borrower is simply changing the interest rate or loan term without taking cash out, an appraisal may not be required, especially if the loan amount is significantly lower than the fair market value.
- Cash-out refinance: If you’re looking to take cash out of your home’s equity as part of the refinance, an appraisal is typically required to determine the property’s current market value.
- FHA or VA refinancing: A government-backed loan, such as an FHA or VA loan, often requires appraisals for both rate and term and cash-out refinances. These appraisals report on the home’s market value and its current condition.
- Conventional loan requirements: Conventional lenders may waive the appraisal requirement for certain borrowers, especially if the borrower has substantial equity and meets specific credit and income criteria. However, this is at the lender’s discretion and can vary between lenders.
- Loan-to-value ratio: If your LTV is low, meaning you have a significant amount of equity in your property, some lenders may consider waiving the appraisal requirement. However, the specific LTV threshold that triggers an appraisal waiver varies between lenders.
- Streamlined refinances: Some government-backed loans, like the FHA Streamline Refinance and the VA Interest Rate Reduction Refinance Loan (IRRRL), offer streamlined, no-appraisal refinance options for eligible borrowers. These programs are designed to make refinancing easier and more efficient.
Keep in mind that while some lenders may offer no-appraisal or appraisal-waiver options, others may still require an appraisal based on their internal policies and risk assessments. Additionally, even if an appraisal is initially waived, the lender may request one during the underwriting process if they have concerns about the property’s value or condition.
Types of Refinance Appraisals
When you prepare for a mortgage refinance, different types of appraisals can be used to determine the current market value of the property. Here are some common types of refinance appraisals:
- Full appraisal: A full appraisal, also known as a traditional appraisal, is a comprehensive assessment of the property’s value. It involves a physical inspection of the property by a licensed appraiser who evaluates various factors, including the property’s condition, size, features on the interior and exterior and location.
- Drive-by appraisal: In a drive-by appraisal, appraisers look briefly at the exterior of the property from the street, but they do not enter the home. Drive-by appraisals are typically used for certain low-risk refinances. The refinance appraisal cost for this is less expensive and time-consuming than full appraisals.
- Desktop appraisal: A desktop appraisal does not involve a visit to the property. Instead, the appraiser relies on available data, including public records, comparable sales in the area and photographs, to estimate the appraisal value. Desktop appraisals are often used for streamlined or low-risk refinance transactions.
- Hybrid appraisal: A hybrid appraisal mixes traditional appraisal methods with technology. It may involve an appraiser inspecting the property’s exterior while relying on data and photos for the interior assessment. Hybrid appraisals are often quicker and more cost-effective than full appraisals.
- Automated Valuation Model (AVM): AVMs are computer-generated property valuations that use algorithms and data analytics to estimate a property’s value. AVMs don’t involve a human appraiser or a property inspection. They are often used for quick and low-risk refinances, but their accuracy can vary depending on the quality of the data and the specific AVM model used.
- Property Inspection Waiver (PIW): Some refinances, especially those involving government-sponsored enterprises (GSEs) like Fannie Mae or Freddie Mac, may qualify for a PIW. In this case, the lender relies on their own data or automated tools to determine the property’s value and may waive the need for a traditional appraisal.
The type of appraisal used can vary by lender, loan program or local regulations. The choice of appraisal type often depends on the lender’s risk assessment and the specific circumstances of the refinancing. Borrowers should discuss the appraisal requirements, including costs and implications, with their lender or mortgage professional to determine which type is needed for their refinance.
Choose Jaro Team for Your Mortgage Refinancing Needs
With a deep understanding of the local real estate market and a proven track record, we are well-equipped to secure the best refinancing options for our clients. We tailor solutions to meet individual financial goals and provide clear guidance throughout the refinancing process. By choosing Jaro, you’ll benefit from a dedicated and experienced team of professionals committed to helping you save money and achieve their homeownership objectives. Contact us today to get started.