In 2020, historic low mortgage interest rates led to a 13.3% increase in mortgage renewals, amounting to $20 million in loans in Canada. Despite this opportunity, many individuals missed out on favorable rates. This trend continues today.
Refinancing is a great tool that may help you lower your interest rate and get more value out of your home sale. But, there’s one thing to consider: the appraisal.
Why do you need an appraisal for refinancing? Didn’t this step occur when you secured the original loan?
Explore the critical role of a mortgage refinancing appraisal and how it can greatly benefit you throughout the refinancing process. Keep reading to uncover the advantages.
What Is a Home Appraisal?
A home appraisal is a professional assessment of your home’s value. And, it’s an important step in the home-buying process.
The professional who appraises your home is licensed or certified to do so. They provide an unbiased, third-party opinion.
The appraiser does make some money from performing the appraisal. But, they do not get paid more or less based on your refinancing status.
Is an Appraisal Necessary for Refinancing? What Does It Entail?
The appraiser will visit your home for 30-60 minutes, evaluating various aspects including:
- The dimensions of the home
- The amenities that come with the property
- The overall condition inside the home
- The overall condition outside the home
- How the home compares to other properties in your area that have sold recently
During this process, the appraiser captures the property’s condition through multiple photos. Utilizing this data, the appraiser assesses the home’s value.
The bank you’re considering for refinancing then employs this valuation, along with your income, assets, and credit history, to determine your loan eligibility.
How Differs a Refinance Appraisal from the Original Assessment?
Even if your home was appraised during the initial purchase, a refinance appraisal is still necessary.
This evaluation safeguards the bank by providing concrete details about your home’s current value. The aim is to ensure the loan amount doesn’t exceed the property’s value.
In the unfortunate event of foreclosure, the bank must sell the property to recover the loaned amount. If the loan surpasses the property’s value, this task becomes challenging. A refinance appraisal prevents such complications, protecting both you and the lender.
Is an Appraisal Necessary When Refinancing Your Home Loan? Find Out Here!
The appraisal process is crucial when applying for a loan refinance. While some refinance loans don’t mandate home appraisals, these exceptions often come with higher interest rates to mitigate the lending risk.
Therefore, it’s wise to expect and prepare for a home appraisal when considering a refinance.
Is There a Cost Associated with the Home Appraisal Process?
As the borrower seeking a loan, you are responsible for covering the appraiser’s fee.
Even if you decide not to proceed with the refinance, you are still obligated to pay the appraiser for their evaluation services on your property.
Paying this fee becomes justified if you secure the desired refinancing terms. However, frustration might arise if the appraisal value is too low, rendering you ineligible for the refinance.
Additionally, homeowners are unable to ascertain the specific value their property needs to meet. During the assessment, lenders cannot communicate with appraisers about the desired value, leaving you uncertain about the appraisal’s worth in relation to your payment.
Breaking Down the Expenses: Home Appraisal Costs for Refinancing Explained
The cost of a home appraisal varies across provinces in Canada. To prevent overcharging, appraisers charge fees that align with the local area’s standards.
For a standard, single-family home, the appraisal fee typically falls between $300 and $500. Larger properties incur higher costs due to the extended time required for the appraisal process.
Preparing for Your Home Appraisal: Tips and Guidelines
No matter what you’re getting the house appraised for, there are a few things you can do to make sure the appraisal goes smoothly. Doing these things may make your home appear nicer for the appraiser:
- Maintain Neatness: Ensure your home is clean and well-maintained.
- Reduce Clutter: Unclutter your space to facilitate an easier appraisal process.
- Easy Access: Ensure the appraiser can move around the house without obstacles.
- Handle Pets: Contain aggressive or overly friendly pets during the appraisal.
- Eliminate Odors: Mask any strong smells and consider lighting a neutral candle to create a pleasant atmosphere.
In general, these factors may not significantly impact the home’s value. Nevertheless, minor differences can enhance the overall appearance and minimize any visible signs of wear and tear in the property.
What Factors Does the Appraiser Consider During the Appraisal Process?
When you’re getting your home ready for the appraisal, there are a few things that you should focus on.
Here are the most important features that the appraiser will care about:
- Condition of the home’s interior
- Condition of the home’s exterior
- Number of rooms that the home has
- The functionality of the home’s layout
- Any improvements that you made to the home within the past 15 years
- Condition of the home’s plumbing, electrical, and HVAC systems
- Any exterior amenities for the home
- The location of your home
- Any unappealing features that your home may have
Assess your home impartially to determine its value. Emotional attachment can sometimes inflate your perceived worth of the property
Why Do You Need an Appraisal to Refinance?
Your refinanced loan operates as a secured loan, backed by the underlying asset – your home. If the refinanced loan isn’t repaid, your lender gains ownership of your home.
To recover their funds, they must sell the property. An appraisal is essential as it precisely determines your home’s value, providing the lender with confidence in the loan.
Lenders assess the loan-to-value ratio, indicating what portion of your home’s value the refinance loan represents. Lowering this ratio minimizes the lender’s risk, making it a critical factor in the refinancing process.
Is a Home Appraisal Required for Refinancing Your Mortgage?
In short, no.
Some lenders might offer refinance loans without requiring an appraisal, but these loans often entail higher interest rates and less favorable terms.
Without an appraisal, lenders lack clarity about the loan’s risk, leading to elevated interest rates as a protective measure in case of foreclosure.
It’s essential to recognize that the appraisal safeguards your interests as well. It assures the lender of your responsible borrowing behavior and showcases your history of timely mortgage payments.
Generally, lenders prefer appraisals to mitigate the risk of lending substantial amounts to unsuitable candidates.
Unless you’re concerned about a high loan-to-value ratio, opting for the appraisal process can establish trust with lenders. It demonstrates your readiness to refinance, enhancing your credibility in their eyes.
What Are the Consequences of Skipping a Refinance Appraisal?
Some individuals choose a no-appraisal refinance for its speed or to avoid appraiser fees. However, the advantages of this approach might not outweigh the drawbacks associated with skipping the appraisal.
Without an appraisal, there’s no substantiated proof for the value claims you make about your home. While a Google search can offer some information, it’s not reliable or current data that lenders can rely on.
Opting for an appraisal provides accurate and current information to your lender, enabling you to secure the most favorable lending terms.
Take the First Step towards Savings!
Why is an appraisal necessary for refinancing your mortgage? An appraisal provides lenders with accurate information about your home’s value, enabling them to offer you the most favorable loan terms for your refinanced mortgage.
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