Understanding the Home Appraisal

If you apply for a mortgage to buy a home or refinance your current home loan, your lender will require an appraisal before approving the loan.
home appraiser

What is an Appraisal?

An appraisal is an important part of the mortgage process. The appraisal is performed by a professional who visits the home, assesses its condition, and compares it to recently sold homes in the area, making adjustments for different features. The appraiser then provides an estimate of the home’s fair market value. The cost of the appraisal is often included in the closing costs paid by the borrower at settlement.  

Homes are Collateral for Mortgages

Your home acts as collateral when you take out a mortgage which means the lender has an ownership interest in the property. If you fail to pay the mortgage payments as promised, the lender has an asset to sell—the home. Mortgages are secured loans since the home guarantees the loan. Since the risk of loss is lower for lenders, mortgage rates are lower than rates on other types of unsecured loans. However, to ensure that the home provides sufficient collateral, lenders set a maximum loan-to-value ratio. That’s the limit on the amount of money they are willing to loan you to a certain percentage of the home’s value.

Appraisals Determine Loan-to-Value Ratios

If you want the most competitive rate, the loan needs to equal 80% or less of what the home is worth on the open market.  Credit worthiness is also an important factor in determining the rate you’ll pay. Many lenders will make loans with a loan-to-value ratio higher than 80%. Some even allow you to borrow as much as 97% of the value of the home. Keep in mind that for any loan-to-value ratio higher than 80%, the rates may be higher and you’ll have to pay Private Mortgage Insurance or PMI. This provides protection for the lender if they must foreclose. To calculate the loan-to-value ratio, a lender needs an appraisal. If the appraiser determines the home is worth less than you’re paying for it, the lender may require you to put additional money down or may not be willing to give you the loan.

Things for a Better Appraisal

If you already own the home and are trying to refinance or sell it, here are some things you can do in preparation that will have a positive effect on the appraisal.

  • Improve curb appeal
  • Mow and clean the yard
  • Examine the exterior of the home. A fresh coat of paint on the front door can make a big difference
  • Document any upgrades you have made
  • Give the home a deep cleaning
  • Patch imperfections in paint, or trim
  • Let the appraiser do their job—don’t follow them around or ask a lot of questions
  • Be open and honest when answering any questions from the appraiser

Now that you understand the role of the appraisal in the mortgage process, it’s easy to see why lenders require them. Appraisals also protect buyers to ensure a property is worth the sales price before going through with the sale.

Take Advantage of Historically Low Mortgage Rates

There is a great opportunity to save money on your mortgage right now. Interest rates won’t stay at decade lows for much longer. Whether you want to refinance and reduce your mortgage payment or purchase a new home, Baltimore County Employees Federal Credit Union is here to help! Contact us at 410-828-4730, 800-234-4730 or [email protected]!

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