Applying for a home loan will always require an appraisal, whether you’re looking for a new house or refinancing. Lenders need to know the property’s true value before they’ll agree to invest a certain amount of money in your mortgage. Let’s go over the appraisal process, how you can prepare for success, and what to do if your appraisal is low.
Even though you’ve been through the appraisal process before, it’ll help to review the basics. The lender will arrange for a third-party professional to conduct your home appraisal (though you will likely be the one paying for it). The appraiser will visit your home to evaluate its size, amenities, and general condition inside and out. Afterward, they’ll research what comparable homes in your neighborhood have sold for recently to come up with a hypothetical selling price for your property, reporting this value estimate to you and the lender.
One advantage of refinancing over buying a home is you have control over the property that will be appraised. Though property values in your area will drive much of the appraiser’s decision, there are still things you can do to cast your home in the best light. Clean it thoroughly, apply a fresh coat of paint to every room and the exterior, and fix those little maintenance issues you’ve been putting off (now is not the best time for major renovations, however).
If your home is appraised for a high value, great job! You’re in an excellent position to refinance with favorable conditions. On the other hand, if the value is so low that you have a negative net worth, or if your home equity is estimated to be less than 80%, things won’t be so easy.
If you believe the appraiser valued your home for much less than it’s worth, you have a chance to appeal their decision, but they aren’t likely to change their mind unless you can prove they made a significant mistake. If you’re stuck with a number that puts you at less than 80% equity, you may still be able to refinance, but you’ll have to pay for private mortgage insurance (PMI) to appease the lender. You can also explore a cash-in refinance, in which you’ll avoid paying PMI by putting up more cash during closing.
Whatever your home appraises for, make sure to discuss next steps with your loan officer. They’ll help you come up with a plan to complete your refinancing process successfully.