Home Appraisal
A home appraisal is an unbiased estimate of a property's fair market value, conducted by a licensed appraiser. Lenders require an appraisal before approving a mortgage to ensure the loan amount does not exceed the property's value. If the appraisal comes in below the purchase price, the deal may need to be renegotiated.
Appraisers evaluate a home using the sales comparison approach (comparing to recently sold similar homes), the cost approach (cost to rebuild), and for income properties, the income approach. The resulting appraisal report is owned by the lender, but buyers are entitled to a copy.
A low appraisal ("appraising low") is a common source of stress in competitive markets. If a home appraised for $420,000 was under contract for $450,000, the lender will only lend against $420,000 — the buyer must cover the $30,000 gap in cash, renegotiate the price down, or walk away.
Appraisals cost $400–$700 and are typically non-refundable. They are also required for refinances: if your home appraised lower than expected, you may not qualify for the rate or cash-out amount you were hoping for.
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- Home Equity
- Home equity is the portion of your home's value that you actually own — the market value minus any outstanding mortgage balance. Equity grows as you pay down principal and as the home appreciates.
- Loan-to-Value Ratio (LTV)
- The loan-to-value (LTV) ratio is the mortgage amount divided by the property's appraised value, expressed as a percentage. An LTV above 80% typically requires private mortgage insurance (PMI) in the US.
- Refinancing
- Refinancing replaces an existing loan with a new one, typically at a lower interest rate, different term, or both. The goal is usually to reduce monthly payments or total interest paid.
- Closing Costs
- Closing costs are fees paid at the end of a real estate transaction to complete the mortgage. They typically range from 2–5% of the loan amount and include lender fees, title insurance, appraisal, and prepaid items.