What is the purpose of a home appraisal?
A home appraisal is generally required by the lender in order to establish that the value of the home will be sufficient collateral for the amount of the loan. The appraisal fee is paid by the borrower after the borrower has received the Lender’s Estimate, the initial disclosures and have decided to proceed with the loan. The appraisal fee is charged to the borrower’s debit or credit card. It is paid directly to the appraisal management company. At closing the appraisal fee is then shown as “Paid outside of closing (POC)” on the final Closing Disclosure”.
A home appraisal is done by an independent appraiser who will generally visit your home and inspect the interior and exterior. However, the appraiser is not performing the same service as a home inspection. Generally, the cleanliness of the interior will not add to or diminish the appraisal value. The appraiser considers many other factors, beyond the inspection, to establish the fair market value, such as comparable values, historic sales and market demand for that area.
Market values fluctuate over time and also vary from neighborhood to neighborhood, causing appraisals to become outdated. Lenders will require a new appraisal if any refinancing is done, and tax assessors generally re-assess property annually. The value established by your bank loan appraisal will not change the assessment set for property taxes as county tax assessors do their own property evaluations.
In either case, the home buyer should monitor the appraisals for fair treatment in relation to similar houses in the surrounding area and in view of the standards set for appraisers by state licensing boards. For tax purposes, there is often a protest deadline. In the case of a loan, the buyer should be comfortable with the appraisal before committing to a firm offer and before the loan closes. Any concerns or complaints should be brought to the attention of the lender or the state regulatory board. Although the appraisal primarily protects the lender, it can also benefit the buyer or home owner by:
- providing assurances that the home is not over-valued
- justifying the amount of the loan
- qualifying you for certain terms
- evaluating equity to remove Private Mortgage Insurance (PMI)
- protecting against negative home equity
- aiding tax and estate planning
- helping determine insurance valuations
- Determining the feasibility of home improvements, refinancing or additional financing