*This post was created in collaboration with Alpine Credits
If you’re planning on tapping into your home equity, it’s important to get your home appraised to determine its value. This is necessary because the value of your home will affect the amount you can borrow.
But how does a home appraisal work when tapping into your home equity? What are the various factors that an appraisal expert will examine before they can calculate what your home is worth? If you’re a bit confused about the appraisal process, here’s a checklist for home appraisal.
Are Home Appraisals Mandatory When Tapping Into Your Home Equity?
Lenders want to know how much a property is worth according to current market conditions before they approve a mortgage or refinance application. For this reason, lenders typically require a home appraisal.
If you’re looking to tap into your home equity, an appraisal will likely be part of the process. That’s because your home equity depends on your home’s current value and the remaining balance on your mortgage. If the appraisal comes in too low, you may not have enough equity to secure a refinance.
Having said that, not all lenders may require an appraisal for a home equity loan. Instead, they may rely on other data to assess the current value of the property. For example, the sale price of similar homes in the area that have recently sold. These are known as “comparative sales”.
However, this method of property value assessment is not as accurate or reliable as a traditional appraisal specifically conducted on a particular property and is therefore not accepted by all lenders.
Some lenders may also be willing to waive an appraisal if you’re only looking to withdraw a small amount of equity. Larger loan amounts usually mean that an appraisal will be required since this puts the lender at a greater risk. The appraisal will help protect the lender from this risk.
Common Forms Of Equity Financing You’ll Need A Home Appraisal
Whether you refinance your home or get a home equity loan, you will likely require an appraisal on your home to help the lender determine its current value.
Home Equity Line of Credit (HELOC)
A HELOC is a secured line of credit that lets you borrow up to a certain amount against your home equity. It works similarly to other types of credit lines, including credit cards, but a HELOC typically comes with a lower interest rate and higher credit limit because it is secured against your home.
A HELOC is a type of revolving credit, which means you can borrow money from your home equity, pay it back, and borrow over again, up to your credit limit. To qualify, you must have at least 20% equity in your home, and the maximum credit limit is 65% of your home’s current market value.
Where Can You Get A HELOC?
Typically, a good credit score is needed to get approved for a home equity loan or HELOC from a bank. But if you have bad credit, that doesn’t mean you can’t get one.
Instead, you can use the services of Alpine Credits to secure a HELOC or home equity loan. Alpine Credits only looks at your equity, and not your credit score or income, so you don’t have to worry about your credit profile when you apply.
Home Equity Loan
A home equity loan is another product that allows you to tap into your home equity. But rather than having continuous access to a credit line, as is the case with a HELOC, a home equity loan pays out a lump sum of money. Then, you’ll need to make regular installment payments to repay the loan over a specific loan term, much like a traditional loan.
With a home equity loan, you can borrow up to 80% of the value of your home, minus the outstanding mortgage balance.
Refinancing
Essentially, refinancing a mortgage means that a homeowner will be ending their current mortgage contract by trading in their original loan and applying for another. This new loan will hopefully come with more favourable rates and mortgage terms. Homeowners often choose to refinance when their mortgage term ends and their contract is up for renewal. However, for a penalty, also known as a “prepayment fee”, they can also break their contract early.
Should You Get Your Home Appraised Before Tapping Into Your Equity?
Even if your lender doesn’t require an appraisal before accessing your home equity, there are a couple of reasons why you may want to have one anyway:
Secure A Lower Interest Rate
If your home has increased in value since you bought it, your loan-to-value (LTV) ratio will decrease. This means the value of your home is much greater than your outstanding loan balance. This reduces the risk for the lender, which means they may be more willing to give you a lower rate on a refinance.
Get Access To A Bigger Cash-Out Payment
The more your home is worth, the more equity you’ll have in your home, depending on what you still owe on your mortgage. If an appraisal shows that your home is worth much more than what you paid, you may be able to tap into a much larger sum of money from your equity.
Checklist For Home Appraisal
In order for the home appraisal to go smoothly, ask yourself the following:
1. Checklist For Home Appraisal: Is Your Home Organized And Tidy?
When it comes to the inspection itself, the appraiser will want to make a thorough report but also needs to do so within a certain timeframe. For that reason, it’s best to keep your home organized and tidy, both inside and out.
2. Checklist For Home Appraisal: Do You Have These Documents?
Similarly, there are a few documents that you should have on hand for the appraiser’s inspection when they arrive on your property. If you do have access to them, it’s good to have:
- A recent copy of the Property Tax Assessment Bill.
- A plot/blueprint or property survey of the home and land.
- Home inspection reports.
- A list of any recent renovations or additions and their costs.
3. Checklist For Home Appraisal: Have You Made An Appointment With The Appraiser?
While your lender will be organizing the appraisal process for you, you’ll need to agree to a specific time and day to have your home appraised.
Once your lender has contacted an appraisal expert, you’ll receive a call from them after one or two business days where you can discuss a date and time to have your property inspected.
What Will The Home Appraiser Check?
Upon the appraiser’s arrival, their inspection of the property should take approximately thirty minutes to a few hours to complete. During that time, they’ll examine several key issues in and around your property to get a basic estimation of the home’s value. Some specific points of examination include, but aren’t necessarily limited to:
- The location of the property.
- The amenities on site.
- The physical condition of both the home and the land it’s built on.
- The age of the house.
- The condition of the plumbing and electricity.
- Required maintenance or repairs.
- The square footage of both the home and the land.
- The number of bedrooms in the home.
- Any recent renovations or additions that the homeowner has made.
- Outbuildings, garages, pools, etc.
How Is Your Home Value Calculated?
Once the on-site inspection of your home and property is finished, the appraiser will not be able to give you a complete report right away. They’ll need to take other factors into consideration when calculating the value of your home.
One of the ways they calculate the value of your home is by comparing and contrasting it to 3-4 other homes that have been sold in the area over the past few years. Doing this will give the appraiser a more accurate assessment of what other homes in the neighbourhood are going for on the real estate market.
For example, if your home is of a similar size to another, but several decades older and in worse condition, it can have an effect on your home’s value. On the other hand, if your home is older, but has been well maintained and is in a condition that’s comparable to the others, your home could rise in value.
How Much Does A Home Appraisal Cost When Tapping Into Your Equity?
A standard appraisal usually costs between $300-400, depending on the location of your home and the type of property it is.
While you, as the homeowner, will have to pay for the appraisal itself, your mortgage lender will retain the rights to the original version of the appraisal report. However, you will have access to a copy of the report to keep for your records.
What Can You Do If You Don’t Agree With The Home Appraisal?
A low appraisal can throw a wrench in your plans to tap into your home equity. If your appraisal comes in low, you have a couple of options to consider:
Check For Mistakes
It’s possible that the appraiser made some errors during the appraisal process. Carefully review the appraisal report to make sure all information is accurate and scan for mistakes.
While appraisers are professionals and don’t typically make a lot of mistakes, blunders can and do happen. So if you spot any discrepancies, you can contest the appraisal and request to have it redone.
Look For Evidence To Back Your Claim
If you choose to contest the appraisal, make sure you have documented proof to support yourself. If you find mistakes, present them accordingly. Even if there aren’t any errors, you can still go a different route by identifying similar homes in the neighbourhood that have recently sold and what they sold for.
Hire Your Own Appraiser
You might consider hiring your own independent appraiser, though you will have to pay out of pocket to do so. Another appraiser may give you a slightly different market value opinion compared to the one hired by the lender. You can then present the new appraisal to your lender to show that your home is worth more than what the original appraisal showed.
Bottom Line On Checklist For Home Appraisal
It’s best to not only have yourself prepared with the appropriate documents for appraisal but to also have your home ready and waiting. This means having the home organized and tidy, both inside and out, to give the appraiser access to everything they need.
Afterward, the only other thing to do will be to wait for the inspection to finish. During that time, it’s best to just sit back and make yourself available for any questions the appraiser has for you.
Home Appraisal FAQs
Why do lenders want a home appraisal before refinancing?
What’s the difference between a home appraisal and a home inspection?
How long does a home appraisal take?
Will I get the home appraisal report?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
