Home Appraisals

Any home purchase or home loan refinance will require a property appraisal. A lender needs to find out how much your home is worth to determine how much they will loan you. Even if you think your home is worth more than you are refinancing, the lender will want to use the home value to determine whether the amount of the loan is less than 80% of the value, which allows the lender to issue more favorable rates.

The lender or mortgage originator hires a professional appraiser to determine the price of your home. In theory, the appraiser is an unbiased source, not beholden to lender or owner. But in reality, the appraiser has pressure from all parties to make the appraisal match the purchase price or refinance amount. Good appraisers will work hard to make a comparison fair to all parties.

Appraisers use methods similar to real estate agents to determine the value of the home. They look at recent comparable sales in the neighborhood of homes with similar square footage. Then they’ll add a value for features your home may have but the comparables don’t, and subtract values for features the comparable homes have that your home does not. The final numbers, usually averaged, is the value of your home.

Appraisals of residential homes conducted in this matter can be rather subjective. How much is an extra balcony or an extended garage really worth to a buyer? How far back in time or how far away does the appraiser go to find a comparable home to use as comparison? Don’t expect those extra features to be valued by how much you paid for them. Though there is an appraisal method that is based on building costs, this method is usually reserved for new homes and buildings, where the building costs are known.

Do you need to prepare for a home appraisal? Though most appraisers say no, it can’t hurt to do some clean-up. Appraisers try to be impartial, but a very messy house could make some subliminal negative impression on the appraiser. Also, if your home is similar to those in the neighborhood (especially tract homes built by one builder), make a list of major improvements your home has, like an extra balcony, extended patio, larger garage, etc.