When you are buying a home or refinancing, you will need to have the home appraised. An appraisal is simply a complete report from a licensed appraiser that determines what the value of the home is based upon several factors:
- How big it is
- When it was built
- Features and amenities
- General condition
When doing your loan or refinance, your lender will usually set up an appraisal for you, but you still have to pay for the appraisal out of your pocket.
What An Appraisal Costs
Most appraisals will cost from $300 to $500. The cost varies upon where you live, the size of the home and its type. The most common type of appraisal is the Uniform Residential Appraisal Report. This appraisal consists of inside and outside pictures, sales comps, and a total cost breakdown of the property.
About Online Appraisals
One thing that some zero down home buyers or owners will do during the loan or refinance process is to get an appraisal online. This can be done by visiting sites such as realtor.com, redfin.com and zillow.com.
While using these real estate websites to get an online appraisal can give you a rough idea of what your home is worth, there are several things to keep in mind:
- Online appraisals are just an approximation of what the system’s algorithm thinks your home is worth. Its estimation is based upon the quality of the data that is in the system. If the data in its system is out of date or of poor quality, you could end up with an appraisal that is far out of line with what the true value is.
- You often do not know what the comps are that the automatic appraisal system is using. If you don’t know which homes it is comparing yours to, how do you know if it is an accurate estimate? When you pay for an official appraisal, you know which houses are being used for comps.
- The sold prices and values in the system may not be accurate. If the data is out of date and the sold prices on the comps are several years old, the value it gives you could be way off.
While it is fine to use an online appraisal to get a general idea of your home’s value, do not get your heart set on the value it gives you, one way or another. The only way to get an accurate picture of the home’s value is with an official, in person appraisal by a qualified expert.
What To Do If Appraisal Comes in Low
A common occurrence with a home purchase or refinance is if the appraised value is lower than the agreed upon price.
Let’s say that you are going to buy the home for $200,000, and you apply for the loan with 20% down. You would need a $160,000 loan and a down payment of $40,000. This means you have an LTV of 80%.
But what if the lender tells you that the house is only appraising for $190,000? This would increase the LTV to 84%. The lender is going to use the lower of the appraised value or the sales price.
This can create headaches because the loan would force you to pay for private mortgage insurance, even if the lender has a loan available for more than 80% LTV.
In this case, you can have the appraisal reviewed, renegotiate the price, or just put more money down. You also will wonder if you are overpaying for the home if it will not appraise for the asking price.
The Bottom Line
In the entire home buying and refinancing process, the appraisal is often one of the most common hang ups that can scuttle a deal that both sides want to get done.
We think that it is a good idea to use a free, online appraisal to get a ballpark idea of what your home is worth. But you should not be overly reliant upon the numbers that the online appraisal gives you.
The only way to be sure about what the home is worth in the current market is to pay for a new appraisal.
Keep in mind when you are negotiating the sales price that you want to pay as little as you can. This is not just so you pay less; you also want to be sure that you are not paying more than the home will appraise for, which will introduce major headaches when it comes time to close the loan.