{"id":18525,"date":"2020-08-26T13:14:31","date_gmt":"2020-08-26T20:14:31","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=18525"},"modified":"2020-08-26T13:14:31","modified_gmt":"2020-08-26T20:14:31","slug":"buyer-refinance-appraisal-vs-purchase-appraisal","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-refinance-appraisal-vs-purchase-appraisal\/","title":{"rendered":"Refinance Appraisal vs Purchase Appraisal: Is There a Difference?"},"content":{"rendered":"

Picture this: You\u2019ve been in your home for a few months, and lately, it seems like you\u2019re getting more and more junk mail encouraging you to refinance your mortgage<\/a>. And it seems like it might be a good deal, so you do a little research into what you need to do. Now you\u2019re confused because you need a refinance appraisal, but you just<\/i> got a purchase appraisal<\/a> before being approved for a mortgage<\/a> \u2014 is there a difference between a refinance appraisal vs. purchase appraisal?<\/p>\n

Yes, there is a difference between the two types of appraisals, and if you\u2019re considering refinancing, you need to understand what those differences are. However, before we get into that, let\u2019s look at some of the reasons why you may consider refinancing in the first place.<\/p>\n

\"A<\/a>
<\/a> Source: (Heather Stewart \/ Unsplash)<\/figcaption><\/figure>\n

The main reason to refinance your mortgage<\/h2>\n

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<\/a>, rates averaged 3.7%, which was the lowest they\u2019d 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<\/a> if they chose to refinance.<\/p>\n

On average, the monthly mortgage payment in the United States is $1,029 \u2014 just under 15%<\/a> of the average American\u2019s monthly earnings. It gets even higher when you include other housing expenses like taxes, utilities, HOA fees<\/a>, and maintenance! With housing costs taking a sizable chunk of someone\u2019s income, it\u2019s understandable that people are interested in saving some money where they can.<\/p>\n

What are some of the other reasons to refinance?<\/h3>\n

Lower mortgage rates and lower payments are excellent reasons to refinance, but there are other reasons someone might want to consider refinancing.<\/p>\n

Converting an adjustable-rate mortgage to a fixed-rate mortgage<\/h4>\n

An adjustable-rate mortgage (ARM) may seem like a good deal with its low introductory rates and flexibility<\/a>, but it\u2019s not always as good as it looks. If you aren\u2019t relocating soon or if you aren\u2019t 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<\/a> depending on the terms stipulated in the contract.<\/p>\n

Converting your ARM to a fixed-rate mortgage (FRM) while rates are low will give you some peace of mind because you don\u2019t have to worry about possible rate increases in the future.<\/p>\n

Use the equity in your home<\/h4>\n

The real estate market is always changing, and if your home has increased in value<\/a>, you may want to consider refinancing and tap into the equity in your home<\/a>. Using your home\u2019s equity can allow you to consolidate high-interest debt, pay off medical bills, make needed improvements around the house, and so forth.<\/p>\n

Note: although you\u2019re exchanging high-interest debt with a low-interest mortgage, you have to be mindful to stay out<\/i> of debt as much as possible. If you get tempted easily, or if you aren\u2019t financially secure and rely on credit to make regular purchases, refinancing to access and strip out your home\u2019s equity may not be in your best interest.<\/p>\n

Pay off your mortgage faster<\/h4>\n

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.<\/p>\n

\"An<\/a>
<\/a> Source: (Adolfo F\u00e9lix \/ Unsplash)<\/figcaption><\/figure>\n

Refinance appraisal vs. purchase appraisal: What\u2019s the difference?<\/h2>\n

Chris Walker<\/a>, a top-selling real estate agent in Alabaster, Alabama, sums up the difference between a refinance and a purchase appraisal:<\/p>\n

\u201cA refinance appraisal is the same thing as a fair-market<\/a> appraisal<\/a>. That is when an appraiser goes in blind and comes up with the home\u2019s value<\/a> solely based on how comparables<\/a> in the area have sold.\u201d (Comparables are also known as comps; they\u2019re recently sold homes near yours that are, well, comparable, and appraisers use those sales prices and adjust them to figure out what your<\/i> house is worth.)<\/p>\n

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.<\/p>\n

In short, refinance and purchase appraisers have the same process for determining a home\u2019s value. The only difference is that a purchase appraiser has access to the purchase contract<\/a> and, therefore, the sales price. They know the house should be valued to make the deal work \u2014 30% of appraisers<\/a> will agree that the purchase price is equal to the asking price.<\/p>\n

On the flip side, refinance appraisers are only working with a homeowner, not a buyer or a seller. There isn\u2019t 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<\/a>. As Walker says, refinance appraisers are \u201cgoing in blind\u201d in a sense because they don\u2019t have a value to use as a starting point.<\/p>\n

What do appraisers look for?<\/h3>\n

When trying to figure out how much your home is worth \u2014 be it for a refinance or to purchase \u2014 a home appraiser has a lot to consider<\/a>. They\u2019ll look at the type of neighborhood the house is in, zoning classifications, the lot size, the condition of the home\u2019s exterior, even the kind of driveway the home has.<\/p>\n

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.<\/p>\n

Walker also mentions that even if your house is the nicest one on the block, many refinance appraisers will cap your home\u2019s value at 10% to 15% more than what your neighbor\u2019s house sold for recently\u00a0 \u2014 but adds, \u201cif you have at least three comps that justify a higher appraisal, then you can get a little more.\u201d<\/p>\n

\"An<\/a>
<\/a> Source: (Andrey_Popov \/ Shutterstock)<\/figcaption><\/figure>\n

Do I need an appraisal if I want to refinance?<\/h2>\n

Most lenders will require a home appraisal (this tends to be a standard requirement), and you\u2019ll 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.<\/p>\n

\u201cIt\u2019s up to your particular lender. If you have enough equity in the house or if you\u2019ve paid off a good chunk of the mortgage, they may not require an appraisal,\u201d for a refinance, explains Walker.<\/p>\n

\u201cHowever, if you only have 10% equity, they\u2019re likely to make a market analysis comparison to determine if an appraisal is necessary.\u201d<\/p><\/blockquote>\n

If neither of these situations applies to you, you\u2019ll be happy to know that there are a few government-supported loan programs that will let you refinance without the appraisal.<\/p>\n

FHA Streamline Program<\/h3>\n

FHA Streamline<\/a> is a program that will pay off your existing, non-delinquent FHA mortgage. Because you already have an existing FHA mortgage, you won\u2019t 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.<\/p>\n

USDA Streamlined Assist Refinance Loans<\/h3>\n

USDA Streamlined Assist Refinance Loans<\/a> 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\u2019ve made 12 consecutive mortgage payments in the last year.<\/p>\n

VA IRRRL (interest rate reduction refinance loan)<\/h3>\n

VA IRRRL<\/a> (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.<\/p>\n

With any of these refinance options, be prepared to pay a couple of thousand dollars in closing costs or new insurance premiums.<\/p>\n

Having a refinance appraisal is in your best interest<\/h2>\n

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\u2019t 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<\/a>, as well as reduce your mortgage rate.<\/p>\n

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\u2019t a viable solution, then perhaps selling your home is<\/a>? Know that you have options, whatever you decide!<\/p>\n

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