There are several steps you need to take when buying a home— from getting preapproved for a mortgage before you start the hunt to getting the home inspected after you’ve put in an offer. Getting an appraisal is also typically part of the process. Appraisals verify the market value of the home, before the sale is complete. They are meant to provide an extra layer of protection for the buyer and for the mortgage lender. An appraisal states the value of a property based on concrete facts (such as its amenities and the value of similar homes in the area) rather than on what a seller hopes a home is worth.
While the appraisal process usually takes place after the home inspection (and is commonly associated with buying or refinancing) — there are a few other times when an appraisal can come in handy:
1. Prior to a Purchase or Refinance
An appraisal is commonly required before a home sale goes through or before a person can refinance an existing loan. In these cases, appraisals are usually performed to protect the lender (as the lenders typically want to refrain from lending more money than the home is actually worth). This process can also benefit a buyer. If the appraisal is lower than the sale price of a home, there is typically a clause in the contract that lets a buyer back out without consequence. If the home’s value is actually more than the sale price, the buyer ends up having more equity in the home right from the start.
2. To Cancel PMI
The Appraisal Institute (an organization for professional real estate appraisers) notes that appraisals are often needed to cancel private mortgage insurance (PMI) on a loan. A home buyer typically needs PMI when the amount they’ve borrowed is higher than 80% of the home’s value. If the home’s value has increased after a few years, a person might owe less than 80% of its value—meaning he or she can cancel the PMI and will no longer have to pay monthly premiums.
3. Prior to a Renovation
Sometimes it make sense to get an appraisal before embarking on a big home rehab or renovation project— particularly if the owner plans on applying for a loan to cover the costs. However, an appraisal can come in handy even if a homeowner doesn’t need a loan. A professional appraiser can look at what features the home currently has and compare them to features others homes in the area have. This will help a homeowner figure out what projects will provide the biggest return on investment.
4. Tax Purposes
A home’s value often determines the amount of property tax a person has to pay. If a homeowner thinks the tax is too high, he or she can often appeal the home’s assessment and get the opinion of an independent appraiser about the home’s value.
Do you have more questions about appraisals or are you wondering if you need one? Get more details by from a mortgage specialist today.
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