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Picture this: You’ve been in your home for a few months, and lately, it seems like you’re getting more and more junk mail encouraging you to refinance your mortgage. And it seems like it might be a good deal, so you do a little research into what you need to do. Now you’re confused because you need a refinance appraisal, but you just got a purchase appraisal before being approved for a mortgage — is there a difference between a refinance appraisal vs. purchase appraisal?
Yes, there is a difference between the two types of appraisals, and if you’re considering refinancing, you need to understand what those differences are. However, before we get into that, let’s look at some of the reasons why you may consider refinancing in the first place.
The main reason to refinance your mortgage
One of the primary reasons people will refinance their mortgages is because the current mortgage rate is better than the rate on their existing mortgage. On March 2, 2020, rates averaged 3.7%, which was the lowest they’d been since 2011. Real estate data and analytics company Black Knight estimated that the average buyer with a $300,000 mortgage could save $266 per month if they chose to refinance.
On average, the monthly mortgage payment in the United States is $1,029 — just under 15% of the average American’s monthly earnings. It gets even higher when you include other housing expenses like taxes, utilities, HOA fees, and maintenance! With housing costs taking a sizable chunk of someone’s income, it’s understandable that people are interested in saving some money where they can.
What are some of the other reasons to refinance?
Lower mortgage rates and lower payments are excellent reasons to refinance, but there are other reasons someone might want to consider refinancing.
Converting an adjustable-rate mortgage to a fixed-rate mortgage
An adjustable-rate mortgage (ARM) may seem like a good deal with its low introductory rates and flexibility, but it’s not always as good as it looks. If you aren’t relocating soon or if you aren’t going to be able to pay off that mortgage when your rates are low, an ARM could cost you a fortune in the long term. Once that introductory period is over, your mortgage rate can change depending on the terms stipulated in the contract.
Converting your ARM to a fixed-rate mortgage (FRM) while rates are low will give you some peace of mind because you don’t have to worry about possible rate increases in the future.
Use the equity in your home
The real estate market is always changing, and if your home has increased in value, you may want to consider refinancing and tap into the equity in your home. Using your home’s equity can allow you to consolidate high-interest debt, pay off medical bills, make needed improvements around the house, and so forth.
Note: although you’re exchanging high-interest debt with a low-interest mortgage, you have to be mindful to stay out of debt as much as possible. If you get tempted easily, or if you aren’t financially secure and rely on credit to make regular purchases, refinancing to access and strip out your home’s equity may not be in your best interest.
Pay off your mortgage faster
When you refinance at a lower mortgage rate, your monthly payments could go down. Instead of paying $1,250 per month, your new payment could drop to $1,000. If you continue to pay $1,250, that extra $250 will go toward your principal balance, the amount still owed on your loan, which means the loan will get paid off faster. Not only can refinancing result in lower monthly payments, but you may also be able to secure a shorter repayment term.
Refinance appraisal vs. purchase appraisal: What’s the difference?
Chris Walker, a top-selling real estate agent in Alabaster, Alabama, sums up the difference between a refinance and a purchase appraisal:
“A refinance appraisal is the same thing as a fair-market appraisal. That is when an appraiser goes in blind and comes up with the home’s value solely based on how comparables in the area have sold.” (Comparables are also known as comps; they’re recently sold homes near yours that are, well, comparable, and appraisers use those sales prices and adjust them to figure out what your house is worth.)
By contrast, says Walker, when appraising for a home purchase, the appraiser has usually seen the purchase contract and has an idea of the target value.
In short, refinance and purchase appraisers have the same process for determining a home’s value. The only difference is that a purchase appraiser has access to the purchase contract and, therefore, the sales price. They know the house should be valued to make the deal work — 30% of appraisers will agree that the purchase price is equal to the asking price.
On the flip side, refinance appraisers are only working with a homeowner, not a buyer or a seller. There isn’t a sales price or contract to use as a starting point, so they must rely on their findings during the home appraisal and looking at comps for your house. As Walker says, refinance appraisers are “going in blind” in a sense because they don’t have a value to use as a starting point.
What do appraisers look for?
When trying to figure out how much your home is worth — be it for a refinance or to purchase — a home appraiser has a lot to consider. They’ll look at the type of neighborhood the house is in, zoning classifications, the lot size, the condition of the home’s exterior, even the kind of driveway the home has.
Inside the home, appraisers evaluate the structural integrity of the home, how many bedrooms and bathrooms it has, the type of foundation, and any upgrades made throughout the house.
Walker also mentions that even if your house is the nicest one on the block, many refinance appraisers will cap your home’s value at 10% to 15% more than what your neighbor’s house sold for recently — but adds, “if you have at least three comps that justify a higher appraisal, then you can get a little more.”
Do I need an appraisal if I want to refinance?
Most lenders will require a home appraisal (this tends to be a standard requirement), and you’ll want to be ready to pay anywhere between $300 to $600 to have it done. However, if you are worried about the appraisal cost, you may be in luck.
“It’s up to your particular lender. If you have enough equity in the house or if you’ve paid off a good chunk of the mortgage, they may not require an appraisal,” for a refinance, explains Walker.
“However, if you only have 10% equity, they’re likely to make a market analysis comparison to determine if an appraisal is necessary.”
If neither of these situations applies to you, you’ll be happy to know that there are a few government-supported loan programs that will let you refinance without the appraisal.
FHA Streamline Program
FHA Streamline is a program that will pay off your existing, non-delinquent FHA mortgage. Because you already have an existing FHA mortgage, you won’t have to provide a lot of extra documentation to get approved for refinancing. You do, however, have to have a credit score of at least 580 and be able to put 3.5% down.
USDA Streamlined Assist Refinance Loans
USDA Streamlined Assist Refinance Loans are designed to help homeowners with an existing, non-delinquent USDA mortgage who have little to no equity. The eligibility requirements for this refinance loan recommend that your credit score should be 640 and above, and your lender must confirm you’ve made 12 consecutive mortgage payments in the last year.
VA IRRRL (interest rate reduction refinance loan)
VA IRRRL (or VA streamline refinancing) is a program for veteran and military homeowners with existing, non-delinquent VA loans. The program is intended to help participants lower their monthly mortgage payment or switch from an ARM to an FRM. Homeowners will not have to put down a down payment to receive this loan, but your credit score should be at least 620.
With any of these refinance options, be prepared to pay a couple of thousand dollars in closing costs or new insurance premiums.
Having a refinance appraisal is in your best interest
Although your lender may not require that you get an appraisal to refinance, it would be in your best interest to go ahead with one. An appraisal could help you get approved for a refinance loan if you don’t qualify for the streamline programs. If your home is worth more than the market price and you owe less than 80%, you could eliminate the need for a private mortgage insurance policy, as well as reduce your mortgage rate.
People refinance their mortgages for many reasons. If refinancing would allow you to make repairs around the home or reduce overwhelming debt, then it may be worth looking at your options. And if refinancing isn’t a viable solution, then perhaps selling your home is? Know that you have options, whatever you decide!
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