Borrowing against home equity—either through a home equity loan or home equity line of credit (HELOC)—can appear almost as complex as handling your primary mortgage. For either option, you’ll need to provide proof of income and whether you can handle more debt, and the lender will judge your credit score and repayment history.
Then there’s your home’s value, which needs to be considered. In other words, do you need an appraisal for a home equity loan or HELOC if you can pass all these qualifications?
While there can be some wiggle room on how thorough the appraisal is, the answer is yes.
A home appraisal is typically required by reputable home equity loan and HELOC lenders.
The Importance of Appraisals in Home Equity Loans and HELOCs
The first deciding factor in taking out a home equity loan vs home equity line of credit (HELOC) is whether you have enough equity in your current home to qualify. This will also determine the loan amount that you qualify for.
Your equity is the amount of your home that you own. It’s calculated by subtracting the total of what you owe on a mortgage and any other loans or liens against your property from its current market value.
You can figure out how much you owe from mortgage statements, but what about current value?
The median sale price for a home in the second quarter of 2023 was $416,100—double the 2009 price, and three times the price in 1996. Even if you purchased your home within the last year, real estate market changes make an appraisal the only official way to determine its current value.
Appraisals help lower the risk of loan default, protecting:
- Lenders by ensuring a foreclosure will yield enough return to cover the debt
- Borrowers from going underwater financially by owing more than a property is worth
Types of Home Appraisals
Do you need an appraisal for a HELOC or home equity loan? As noted above, yes; but the type of appraisal is up to each lender. The options include1:
- Full walk-through appraisal
- Exterior-only appraisal
- Automated valuation Model
- Desktop appraisals
Full Walk-Through Appraisal
A traditional, walk-through appraisal is most common for establishing an accurate market value of a home. It entails an in-home visit and inspection by a licensed appraiser, where they:
- Inspect the interior and exterior
- Take measurements and pictures
- Record or note commentary on the home’s condition and features
Subsequently, they establish property comps, which are recently sold homes similar in size and room breakdown. They use these comparable property sale prices, adjusted for your home’s condition and features, to set the appraised value of your property.
- Are accepted as the most accurate standard
- Require the most time to schedule and complete (one to several hours on site)
- Have a high appraisal fee: $300–$500 on average, higher for complex or large-city properties
Drive-By or Exterior-Only Appraisal
With this home appraisal model, the appraiser drives to the home and reviews the exterior without stepping foot inside. In addition to generating property comps, the appraiser may evaluate:
- Exterior photos taken during the drive-by
- Interior photos and reported information provided by the homeowner
- MLS (multiple listing service) photos
Drive-by appraisals come with a smaller appraisal fee ($150–$275) but are less accurate than walk-throughs. They’re more open to miscalculation or manipulation by relying on secondhand information and photos.
Automated Valuation Model (AVM)
AVMs are algorithms that compile, compare, and calculate publicly available real estate data. There is no on-site visit with an AVM. Instead, an AVM will:
- Generate property comps from recent sales
- Review published property information from the deed, MLS, etc.
- Provide immediate results—no scheduling or human work time involved
- Provide purely objective calculations without subjective bias, fraud, or errors
However, they don’t calculate property conditions or unpublished features and improvements, which can result in dubious results for some homes.
The versions that are freely available on the internet (home value estimators or online property appraisal tools) fall into the “estimate” category rather than “appraisal,” but some lenders use proprietary or specialized industry AVMs to perform virtual appraisals for home equity loans and HELOCs.
The final option is a desktop appraisal from a licensed professional with no home visit at all. The appraiser uses both software and their own interpretation of:
- Tax records
- MLS data
- Property photos
- Detailed floor plans
Desktop appraisals typically cost $100–$150.
Alternatives to Home Equity Loans and HELOCs
It is important to know that there are both pros and cons of home equity loans. Before choosing this financing option consider, “Is a home equity loan a good idea for me?” If your appraisal is lower than predicted or if you’re worried you will have a denied home equity loan application, there are other ways to raise the funds you need. Be sure to look into options like:
- Cash-out refinance
- Credit card with a sign-on bonus such as zero interest on balance transfers
- Personal loan secured with alternate collateral or a co-signer
- Sale-leaseback to raise cash without debt and without moving out of your home
You’ll need a professional appraisal in order to borrow a home equity loan or HELOC, but lenders vary in what type of appraisal they require.
Options include a full walk-through, drive-by exterior, or desktop appraisal from a professional, licensed appraiser, or an AVM appraisal.
If you can’t qualify for a home equity loan or HELOC, alternatives include credit cards, a personal loan, a cash-out refinance, or a sale-leaseback.
- The Mortgage Reports. HELOC appraisal requirements for 2023 and no-appraisal HELOCs. https://themortgagereports.com/97647/heloc-appraisal-requirements
- FRED. Median Sales Price of Houses Sold for the United States. https://fred.stlouisfed.org/series/MSPUS
- LendEDU. What Is the Appraisal Process for Home Equity Loans and Lines of Credit? https://lendedu.com/blog/appraisal-home-equity-loans-and-lines-of-credit/
- CostHelper. How Much Does a Property Appraisal Cost? https://personalfinance.costhelper.com/property-appraisers.html
- Kairos. Understanding the Different Types of Home Appraisals. https://kairosappraisal.com/different-home-appraisal-types/