By Dian Hymer
Homeowners are often disappointed when the refinance appraisal of their home comes in lower than expected. For some owners a low appraisal is simply insulting, for others it can put their refinancing plans into jeopardy.
People refinance their homes for a variety of reasons. The most common are: to save on the monthly house payment, to consolidate debt or to turn equity into cash. On refinances, most lenders limit the new mortgage amount to 75 or 80 percent of the appraised value.
Let's say your home appraises for $300,000 and the lender will lend you 80 percent of the appraised value, or $240,000. Your current mortgage, which is $220,000, has to be paid off before the new loan closes. Even if you take a no-point mortgage, there will be some closing fees which will leave you about $18,000 in net proceeds from the refinance. If your credit card debt and car loans total $30,000, and your aim is to consolidate these into one low-interest rate home loan, you'll come up short.
Suppose, however, that your home appraises for $350,000. Eighty percent of the appraised value is $280,000, which gives you more than enough to accomplish your goals.
Call it pride of ownership or wishful thinking, homeowners often have an over-inflated opinion of the value of their property. In the homeowner's defense, refinance appraisals can also be way off the mark.
Home mortgage appraisals are based on market data. The subject property is compared with at least three similar properties in the neighborhood that have sold recently. Dollar adjustments are made to account for differences between the subject property and the others. The appraiser arrives at a price based on these comparisons.
Appraisals are easiest to do when there are a lot of recent comparable sales and where the properties are somewhat uniform. For example, it shouldn't be too difficult to appraise a 3 bedroom, 2 bath home in a housing tract where 5 similar homes sold within the last three months in a price range of $245,000 and $250,000. But, arriving at an accurate appraised value for a unique property or when there are few, if any, comparable sales is more subjective and prone to error.
First Time Tip: A fair amount of time and effort is involved in refinancing a property. Also, appraisal fees can run into hundreds of dollars. So before submitting an application, call your real estate agent and find out what the recent comparable sales indicate would be an approximate selling price for your home in the current market. If the sales information suggests that your home will appraise for enough to make refinancing worthwhile, then submit a loan application.
When the appraiser comes to inspect your property, make sure that he or she knows about any remodeling you've done. If you've done a lot of work to the house, prepare a list of improvements. This information may be important to the appraiser when he compares your home to others.
An appraisal can come in low because the appraiser isn't selecting truly comparable sales for his or her analysis. This can happen if the appraiser doesn't know the local market well. If you find that your home isn't appraising for what you think is realistic, ask for a copy of the appraisal so that you can find out which comparables the appraiser used.
The Closing: If the appraiser has overlooked a sold property that your agent thought was comparable to yours, give this information to your loan broker and ask that the appraiser reconsider his analysis.
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