Does a Home Equity Loan Require an Appraisal?
Are you a homeowner? If so, tapping into the value of your house by qualifying for a home equity loan is an easy way to obtain the funds you may need for debt consolidation, paying for home improvement projects, or covering a major life event. These types of loans typically have lower interest rates than a credit card or personal loan, so you’ll be able to repay your debt faster.
But how do you establish the actual value of the house? Do home equity loans require appraisals?
Do You Need an Appraisal for a Home Equity Loan?
The answer to this question is: it depends.
A home equity loan is a secured loan, meaning it’s backed by collateral—in this case, the house. Should you default on your monthly payments, the lender could seize your home. Most lenders will allow you to borrow up to 85% of the home’s value. Be sure you know the pros and cons of home equity loans before determining if this is the right loan option for you.
Because a home could be worth hundreds of thousands, if not millions of dollars, there needs to be financial data underwriting the mortgage loan. The lender must be able to establish the value of the home and the equity therein. And, typically, a home equity loan appraisal is the most accurate way to accomplish this.
That said, a full appraisal isn’t mandated as it would be for a primary mortgage. Lenders have greater flexibility to use whatever sales comparisons and valuation methods they see fit. For instance, some lenders can leverage county assessment records or automated valuation models to discover pricing “comps.” Other reasons why you may not require a full appraisal include:
- The lender holds your current mortgage, meaning they already understand the property’s actual value.
- The loan amount is small, so it has a low loan-to-value percentage.
- An appraisal report was already conducted recently in the last year.
Why Are Appraisals Important?
As discussed, the lender wants to know the home’s true worth before handing over a lump sum of cash. When it comes to how to get a home appraisal, you’ll be working with your lending organization, who performs due diligence to protect itself from the risk of default. So, lenders verify that they’ll be able to recoup the loan’s cost via the home equity if the borrower fails to make monthly payments.
The amount you can borrow on a home equity loan depends on your financial credit history, personal credit score, loan-to-value percentage, and your home’s equity.
An appraiser looks at both the local housing market and the house itself to determine the property’s actual worth at that time. Often, this is determined by compiling data, such as:
- Neighborhood comps
- Structural construction
- Home’s age
- Upgrades and updates
- Curb appeal
- Design style
- Square footage
- Number of bedrooms and bathrooms
- Other amenities
- Interest rates
- Economic indicators
They have other factors in their home appraisal checklist to determine the appraised value, but some are left confidential.
How Does a Home Equity Appraisal Work?
The answer to this depends on the type of appraisal the lender utilizes. There are a few common variations of getting a home appraisal, including:
- Full appraisal – A licensed appraiser thoroughly inspects the property—both inside and out—and produces a report comparing the property to other homes recently sold in the area. There are more home appraisal value factors involved in this type of appraisal.
- Limited appraisal – Sometimes referred to as a drive-by appraisal, an appraiser looks at your home’s exterior and then prepares a report. In that report, they identify the home’s recent upgrades, condition, and deficiencies compared to recently sold properties in the neighborhood.
- Automated valuation method (AVM) – As mentioned, an AVM is a faster and easier alternative to a traditional appraisal. It uses automated intelligence, mathematical modeling, and historical data from multiple listing services like Zillow or Trulia to determine a market price. AVM leverages: recent average and median home sales figures, historical average and median home sales figures, and neighborhood trends.
- Tax-equalized value – A county tax assessor can determine an assessed value based on the home’s market value. The figure can then be adjusted by applying the state equalization factor to correspond with taxation levels for the area. Armed with that information, lenders can reverse engineer an estimated market value.
Another Way to Determine Home Equity
- Fair Market Value
Fair market value (FMV) is how much an asset (in this case, a home) would sell in an open market. The difference between fair market value and appraisal value is FMV’s price is determined on certain conditions. Here’s an example: A $200,000 home might get a higher value if located in an upscale neighborhood; thus, you might get higher home equity loan rates.
Reminders Before Getting Home Appraisal:
Usually, it’s you, the borrower, that has to pay the appraisal fee regardless of whether you continue with your home equity loan or not, especially if the appraiser already conducted the appraisal. The appraisal fee is just one of the closing costs before reaching a final deal and selling your house.
The Best Way to Leverage Your Home Equity
Traditionally, acquiring either a home equity loan or a home equity line of credit (HELOC) was the primary way homeowners could leverage their home’s value. A home equity line of credit is particularly known for its fixed interest rate advance, much like a credit card. But now, a sale-leaseback program provides an alternative path.
It’s simple—sale-leaseback solutions allow you to convert your home equity into a usable resource. Interested in a home equity loan alternative? Consider a sale-leaseback option. Through this, you can convert your home’s equity to cash by selling your home and leasing it back. No traditional home equity loan needed.
Tapping into the value of your house by qualifying for a home equity loan is an easy way to obtain the funds you may need to consolidate debts, pay for renovations, or cover a major life event. If you are still unsure of alternative options to obtain funds, after reading this article, consult a financial advisor to discuss your options.
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- Bankrate. Requirements for a home equity loan or HELOC in 2021. https://www.bankrate.com/home-equity/requirements-to-borrow-from-home-equity/
- Money Wisdom. Do You Require An Appraisal For A Home Equity Loan? https://go.hfcu.org/blog/bid/146240/home-equity-faqs-do-you-require-an-appraisal-for-home-equity-loans
- National Tax Lien Association. Property Taxes. https://www.ntla.org/page/UnderstandYourTaxes
- American Financing. What to Expect from a Home Appraisal: Your Checklist for Success.
- Investopedia. Home Appraisals: Your Key to a Successful Refinance.