Most mortgage refinances require a home appraisal, and understanding what that process involves can help homeowners prepare, avoid delays, and set realistic expectations about how the appraised value might affect their refinance terms. While the appraisal itself is generally out of the homeowner's direct control, knowing what appraisers look for and how the process typically unfolds can reduce surprises.
Why Lenders Require a Refinance Appraisal
An appraisal establishes the current market value of the home, which the lender uses to calculate the loan-to-value (LTV) ratio for the new loan. LTV affects several things:
- Whether the refinance is even possible, since most loan programs cap the maximum LTV they'll allow.
- Whether private mortgage insurance will be required on the new loan.
- The interest rate offered, since many lenders price loans differently based on LTV tiers.
- For a cash-out refinance, how much cash the homeowner is eligible to receive, since cash-out programs typically cap the amount that can be borrowed as a percentage of the home's appraised value.
When an Appraisal May Not Be Required
Not every refinance requires a full appraisal. Common exceptions include:
- Streamline refinance programs, such as certain FHA and VA streamline options, which may waive the appraisal requirement in many cases since they're designed to lower the borrower's rate without re-underwriting the full loan. Details on these programs are covered in a guide to streamline refinancing.
- Automated valuation models (AVMs), which some lenders use in place of a traditional appraisal for certain loans with strong LTV and credit profiles, relying on data analytics rather than a physical inspection.
- Appraisal waivers, offered by some lenders and loan programs when data confidence in the home's value is high enough, though these aren't guaranteed and depend on the specific loan and property.
Whether an appraisal is required depends on the loan program, the lender, the homeowner's equity position, and sometimes the property type, so it's worth asking a lender directly early in the refinance process.
What Happens During the Appraisal
A licensed, independent appraiser is typically ordered by the lender (not chosen directly by the homeowner, to maintain independence in the valuation). The general process includes:
- Scheduling. The appraiser contacts the homeowner or their representative to arrange a time to visit the property.
- Exterior and interior inspection. The appraiser examines the home's condition, layout, square footage, number of bedrooms and bathrooms, and notable features or defects. This typically takes anywhere from 30 minutes to a couple of hours depending on the home's size and complexity.
- Comparable sales research. The appraiser researches recent sales of similar homes in the area (known as "comps") to establish a value range, adjusting for differences in size, condition, upgrades, and location.
- Report preparation. The appraiser compiles a written report with the estimated value, supporting comps, and photos, which is sent to the lender, typically within several business days to a couple of weeks.
What Appraisers Look For
While appraisers aren't home inspectors and don't evaluate every system in detail, they generally note:
- Overall condition and maintenance of the home, interior and exterior.
- Square footage and layout compared to comparable properties.
- Updates or renovations, such as kitchen or bathroom remodels, that could affect value.
- Safety or code issues that might affect marketability, such as visible structural damage, or missing handrails.
- Curb appeal and condition of the immediate neighborhood.
Preparing for a Refinance Appraisal
Homeowners can take a few reasonable steps to help the appraisal reflect the home's true condition:
- Complete minor repairs, such as fixing leaky faucets, patching visible wall damage, or replacing broken fixtures.
- Tidy and declutter both the interior and exterior, since a clean, well-maintained appearance can influence an appraiser's overall impression.
- Provide a list of upgrades or renovations completed since the last appraisal or purchase, along with approximate dates and costs, which the appraiser may factor into the valuation.
- Ensure easy access to all areas of the home, including the attic, basement, and crawl spaces if applicable.
If the Appraisal Comes in Low
Sometimes an appraisal returns a value lower than expected, which can affect the loan amount available or push LTV above the threshold needed for the planned refinance. Options in that situation may include:
- Requesting a reconsideration of value, where the homeowner or lender provides additional comps or points out factual errors in the report for the appraiser to review.
- Adjusting the loan amount to fit within the LTV limits based on the lower appraised value.
- Bringing additional cash to closing to make up the difference, particularly relevant for a cash-out refinance where less equity is available than anticipated.
- Waiting and reapplying later, if market conditions or home improvements might support a higher value in the future.
Weighing the Refinance Overall
Since the appraisal outcome directly affects loan terms, it's often helpful to review current equity using a home equity calculation beforehand to set realistic expectations, and to run different value scenarios through a refinance break-even calculator to see how the appraisal outcome might affect the overall cost-benefit of refinancing, including closing costs associated with the new loan.