Should you Get a Home Appraisal before Refinancing?
As mortgage rates remain low, many homeowners are looking toward
refinancing their homes. There are definite advantages to doing so,
including saving massive amounts of money on interest payments and
lowering your monthly payments. Refinancing to a lower interest rate can
also help you to pay off your home faster. Before you begin to think
about all of the money you will save; however, it is important to
recognize that most lenders will require a professional appraisal. An
appraisal provides an assessment of the value of your home and can play
a large role in determining approval for a refinance loan.
There are some programs available that will allow you to skip over the
appraisal process, provided you qualify. For instance, the Federal
Housing Administration as well as the Department of Veterans Affairs
both offer a type of streamlined refinance program. Under both these
program, it is not necessary for eligible homeowners or borrowers to
obtain an appraisal.
Under the FHA program you must have a current FHA loan and must be
obtaining a refinance loan that is also FHA backed. Provided that you
wish to lower your monthly payment and that all previous payments have
been timely, you likely will not need an appraisal under this program.
Even if you are not required to obtain an appraisal, it could still be
in your best interest to do so. For instance, if your home is more
valuable than the amount stated by the lender, an appraisal could stop
the lender from issuing a loan that is based on an amount that is too
low. Should the appraisal bear out the higher value of the home, you may
be able to take advantage of additional financing products.
An appraisal can also help you to avoid private mortgage insurance or
PMI. If you are already required to have PMI on your existing mortgage,
a new appraisal could demonstrate that the loan amount is less than 80%
of the home's value, you could easily avoid making those additional
payments each month. Over the course of time, eliminating private
mortgage insurance can save you quite a bit of money.
Appraisals can also be beneficial in helping you to obtain an even lower
interest rate. Whenever the loan to value ratio is too high many lenders
respond by charging a higher interest rate to help in compensating for
the increased risk they are taking by making the loan. On the other
hand, an appraisal can show a lower loan to value ration and make it
possible to qualify for lower interest rates. Ultimately, this can help
to lower your monthly payments.
While there are clearly advantages to having an appraisal on your home
when trying to refinance your mortgage, there are also some
disadvantages you should be aware of as well. An appraisal does involve
a cost. Most appraisals average around $400. For homeowners who are
already trying to lower their monthly payments through a refinance, that
price might be steep. Still, others see the cost of a professional
appraisal as being an investment if they are able to obtain a refinance
loan and lower the cost of their monthly mortgage payments and save
money on interest.
There is also the risk of a low valuation. If there have been numerous
short sales or foreclosures in your local neighborhood, you are at an
even greater risk of an appraiser finding the value of your home to be
lower than you thought. Many homeowners are often surprised to discover
just how quickly home values can fluctuate. Not only can a decline in
prices in the area affect the value of your home, but it can also affect
the refinance options that are available to you. For instance, if the
value of your home is less than the maximum LTV or loan to value ratio
allowed by your lender, it is entirely possible that you will not be
able to receive a refinance loan at all.
If you are concerned about the possible outcome of an appraisal, the
best step is to get in touch with a professional who can provide you
with a ballpark idea of your home's value before you even get the ball
rolling on refinancing. Another option is to contact a real estate agent
and ask them to provide you with a market analysis. Many real estate
agents will provide this service free of charge or at least at a price
less than a full appraisal.