What exactly is a home appraisal?

A home appraisal is an independent estimate of what a home is worth. It includes a visual assessment of the condition of the home, and a comparison to other similar properties that have sold, or are for sale, in the same neighborhood. Depending on the location and size of the home, an appraisal can cost anywhere from $300 to $400 or higher. It takes a couple hours and is typically paid for by the person who is borrowing the money: the buyer for a new home purchase, or the homeowner when refinancing.

Do I need a home appraisal?
Most lenders require an appraisal for new home purchases. It protects the lender, buyer and homeowner by letting everyone know the final purchase price is in line with the home’s fair market value.

Appraisals are usually required when it comes to refinancing, but not always. Some loan programs like the FHA Streamline Refinance program don’t require an appraisal if you already have, and refinance to another, FHA loan. Other times, the decision to get an appraisal (and avoid the step and cost altogether) is up to the homeowner. This might happen depending on the type of refinancing loan and terms the borrower applied for, and with which lender. Or the requirement could even be waived as part of a lender’s promotional offer. 

If getting an appraisal is ever an option for you when refinancing, it will likely be in your interest to get one. The reasons include:

Your home might be worth more than what the lender thinks, who might not know about upgrades you’ve made.

If you have private mortgage insurance (PMI), having a home valued too high compared to the loan amount could allow you to get rid of the insurance.

If the lender thinks your home’s value is too high compared to the loan amount, that could give you an interest rate that’s too high

What’s the difference between a home appraisal and a home inspection?
An appraisal is a visual assessment of the obvious condition of the home, including the interior and exterior, and how well the home has been maintained. Appraisals also include what are called “comps.” These are a cost and size analysis and comparison to other similar homes currently for sale, or that were recently sold, in the same neighborhood. A home inspection, on the other hand, is an examination of the structural condition of the home. From appliances to heating and cooling systems, it lets you know if everything is working. It tells you about the condition of the home’s foundation, roof, exterior and all parts of the home’s construction. You’ll find out what works, what’s OK, and what repairs might be needed.

What are comps?
Comps are the most important part of a home appraisal, and are the best way to estimate a home’s value. They compare the home to at least three other recently sold homes in the same neighborhood. They include sale price, age of the house, size, square footage, upgrades and any other distinguishing features, like a pool. Because no two homes are the same, starting with these common characteristics is a good starting point. From there, the estimate is easily adjusted up or down to account for differences – if one property has a pool and another doesn’t, the price of the pool is simply added or subtracted from the estimate. After all the variables have been considered, the final value is then stated as a price per square foot. So two homes with the exact same square footage will have a different estimated value based on all the above factors.

What does an appraiser look for?
Remember, an appraiser only looks at the obvious, visual condition of the home. Not the structural integrity, whether something works or not, is in perfect condition or needs repair. 

Here’s a general list of what an appraiser will look at:
Visual inspections of the foundation, plumbing and electrical systems, exterior and roof
Condition and type of interior walls, flooring, fixtures, and appliances
Amenities: extras like a security or intercom system, solar panels, swimming pool, gazebo
Size and condition of the land the home is on, condition of the yard and landscaping
Remodeling or other upgrades to kitchen or bath, and appliances
Number of bedrooms and bathrooms
Quality of the basement and attic
Surrounding neighborhood and area
Sale price of other area homes
Square footage of the home

The appraisal report
When it’s all over, the lender, and the buyer or homeowner who is refinancing, will receive a final report that will include:
Size, square footage and condition of the home
Notes on any obvious problems or areas requiring repairs
Details on appliances and fixtures throughout the home
It will point out any improvements or remodeling
Description of the neighborhood and surrounding area
Maps, photos and drawings of the property
Comps and an analysis of the current market
Source:Kim Kelman - Prime Lending 210-483-4901