Housing Market

Does a Home Equity Loan Require an Appraisal?

Tom BurchnellReviewed by

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 to consolidate debts, pay for renovations, or cover a major life event. 

But how do you establish the actual value of the house? Does a home equity loan require an appraisal? 

Let’s discuss. 

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 payments, the lender could seize your home. Most lenders will allow you to borrow up to 85% of the home’s value.   

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. A lending organization 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 payments. 

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: 

  • Location
  • 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.  

Convert your Home Equity to Cash

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.

EasyKnock: 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. Home equity line of credit is particularly known for its fixed-rate advance. But now, EasyKnock provides an alternative path. 

How so? 

It’s simple—we provide solutions to allow you to convert your home equity into a usable resource. Interested in a home equity loan alternative? Try our sale-leaseback option. With EasyKnock, you can convert your home’s equity to cash by selling your home to us and leasing it back. No traditional home equity loan needed.

Our mission is to provide American homeowners with new and inclusive solutions—that means no hard limits on credit or income type.

Learn more about how EasyKnock can help you today!  

This article is published for educational and informational purposes only. This content is based on research and/or other relevant articles and contains trusted sources, but does not express the concerns of EasyKnock. Our goal at EasyKnock is to provide readers with up-to-date and objective resources on real estate and mortgage-related topics. Our content is written by experienced contributors in the finance and real-estate space and all articles undergo an in-depth review process.

Sources:

  1. Bankrate. Requirements for a home equity loan or HELOC in 2021. https://www.bankrate.com/home-equity/requirements-to-borrow-from-home-equity/
  2. 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
  3. National Tax Lien Association. Property Taxes. https://www.ntla.org/page/UnderstandYourTaxes
  4. American Financing. What to Expect from a Home Appraisal: Your Checklist for Success.
  5. https://www.americanfinancing.net/mortgage-basics/home-appraisal-checklist
  6. Investopedia. Home Appraisals: Your Key to a Successful Refinance.
  7. https://www.investopedia.com/articles/personal-finance/042514/home-appraisal-your-key-successful-refinance.asp 
Tom Burchnell
Product Marketing Director

Tom Burchnell, Director of Digital Product Marketing for EasyKnock, holds an MBA & BBA in Marketing from University of Georgia and has 6 years of experience in real estate and finance. In his previous work, he spent time working with one of the largest direct lenders in the SouthEast. 

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