Why Do You Need an Appraisal to Refinance?

why do you need an appraisal to refinance

In 2020, mortgage interest rates reached historic lows. In response, the total number of mortgage renewals grew to 13.3% during this time.

While this pushed about $20 million in loans in Canada, many people didn’t take advantage of the interest rates. And, it seems like the same trend is still happening.

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 to refinance? Didn’t you already do that when you took out the original loan?

Keep reading to learn more about the importance of a mortgage refinancing appraisal and how it could help you during the refinancing process.

What Is a Home Appraisal?

home appraisal - couple in their 50s with a real estate agent looking at their property

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.

Does a Refinance Require an Appraisal and What Happens During It?

The appraiser will come to your home for 30-60 minutes. While there, the appraiser will consider a multitude of home characteristics, including the following:

  • 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 will take several photos of the property to document its condition.

With all of this information, the appraiser comes to a conclusion about what they believe the home’s value is.

In turn, the bank you’re thinking of refinancing with uses this value to determine how much of a loan you qualify for. The bank may also consider your income, assets, and credit history to make this determination.

How Is a Refinance Appraisal Different From the Original Appraisal?

Even if you already had an appraisal of your home when you bought it, you need an appraisal with your loan refinance. 

A refinance appraisal protects the bank by giving them tangible information about your home’s value. They want to make sure that they aren’t loaning you more money than the home’s value.

If the property goes into foreclosure later, the bank would need to sell the property in order to get the money it loaned back. If it loans more than the property value, it would be difficult to do this.

Is an Appraisal Required for a Refinance?

The appraisal process is important when it comes to applying for a loan refinance. There are only a few types of refinance loans that don’t require home appraisals.

However, these lenders have to raise the interest rate in order to compensate for the money they’re lending you.

So, you should anticipate having to get an appraisal for your home.

Do I Have to Pay for the Home Appraisal?

As the loan borrower, you would be responsible for paying the appraiser.

Even if you don’t go through with the refinance loan, you would have to pay the appraiser if they performed the evaluation for your home.

The fee is worthwhile if you get the refinancing terms that you want. However, some borrowers may become frustrated if the appraisal value is too low and causes them to not be eligible for the refinance.

Further, homeowners cannot get an estimated amount of what their property value would need to be. Lenders cannot talk to appraisers about the target value during the assessment.

So, you won’t know whether the appraisal is worth your payment or not.

How Much Is a Home Appraisal for Refinancing?

Photo of a young couple talks about home appraisal refinance

The cost of an appraisal varies from province to province. To avoid price gouging, appraisers have to charge fees that are reasonable for the area your home is in.

If you have a standard, single-family home, you should expect to pay between $300 and $500 for the home examination.

Bigger properties are more expensive because the appraisal process takes more time for these properties.

How Can I Prepare for an Appraisal?

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:

  • Make sure your home is neat and clean
  • Unclutter the home to make the appraisal easier
  • Ensure that the appraiser can get around the house easily
  • Contain your pets, especially if they’re aggressive or too friendly
  • Mask any obvious smells and light a neutral candle

Overall, these things shouldn’t matter for the value of the home. However, small differences can better the appearance of any wear and tear that may exist with the home.

What Does the Appraiser Look For During the Appraisal?

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

You have to look at your home objectively when you’re assessing the value. It’s easy to let your emotional connection to the home raise the value for you.

Why Do You Need an Appraisal to Refinance?

Appraisal Report with house and pen.

Your refinanced loan is still a loan. Mortgage loans are secured loans, meaning that there’s an underlying asset behind the home.

In this case, that asset is the home.

If you don’t pay off the refinanced loan, your lender would gain ownership of the home. In turn, they’d have to sell the home and get their money from the loan back.

The appraisal is the best way for your lender to determine how much the home is worth. Lenders will feel more comfortable taking on the big risk of a loan when they have an appraisal to back up the home value.

The main calculation that lenders are worried about is the loan-to-value ratio. By calculating the loan-to-value ratio, your lender will know what percentage of your home’s value the refinance loan is.

The goal is to keep this ratio as low as possible. The higher it is, the more risk the lender takes on.

Do You Have to Get Your House Appraised to Refinance?

In short, no.

Some lenders may allow you to get a refinance loan without an appraisal. However, these refinance loans may come with higher interest rates and other unfavorable terms and conditions.

The lenders don’t have a clear idea of what kind of loan relationship they’re getting into. So, they’re more likely to give higher interest rates to protect themselves in case of a foreclosure.

It’s important to understand that the appraisal is there to protect you, too.

The appraisal value lets the lender know that you will act responsibly with the amount of money that you’re going to borrow from them. It also shows that you have experience in paying for the home from your original mortgage.

Overall, refinance lenders are going to want an appraisal so that they can protect themselves from lending too much money to the wrong people.

Unless you’re worried about having a high loan-to-value ratio, you should opt for the appraisal process, too. It can build rapport with the lenders and allow them to see that you’re prepared to refinance your mortgage at this time.

What Are the Drawbacks of Not Getting a Refinance Appraisal?

Some people opt for a no-appraisal refinance because of the quicker timing or the absence of appraiser fees. But, these pros may not make up for the drawbacks that come with skipping the appraisal.

If you don’t get an appraisal on your home, there’s nothing to back up the claims you make about your home’s value.

A Google search may give some information about the value your home should be, but this isn’t concrete, current information that the lender can use.

Getting an appraisal is helpful in most situations. It allows your lender to see exactly how much your home is worth. So, you can get the best lending terms.

Refinance Your Mortgage With Lend Today!

So, why do you need an appraisal to refinance? Well, an appraisal is the best way for a lender to get the information that they need about your home’s value.

In turn, this exact calculation of your home’s value can help you get the best loan terms and conditions for your refinanced mortgage loan.

When you’re ready to start the appraisal process and get your mortgage loan refinanced, you can trust our team at Lend Today. Get started today and apply for a refinanced mortgage now.

David Cumberbatch