An appraisal is almost always necessary when refinancing a mortgage loan. However, certain lenders may exempt you from this requirement if you have a Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or U. S. Department of Agriculture (USDA) loan.
It is possible to refinance without an appraisal, which can make the process faster and easier. But there are times when you will need an appraisal or may want to opt for one, even if you could get approved without it. Appraisals are also necessary if you want to refinance your mortgage. As with the appraisal of a purchase, a refinance appraisal protects the bank by ensuring that it does not lend the borrower more money than the property is worth.
If the property later goes into foreclosure for any reason, the lender wants to be able to resell it and get their money back. A home appraiser evaluates your home and determines its market value. When you decide to refinance your home, your lender may require you to get an appraisal before approving the new loan. However, a refinance appraisal may not be required in all cases. For example, if you're refinancing an FHA loan to get rid of mortgage insurance, you'll need an 80% Loan-to-Value (LTV) ratio to avoid mortgage insurance on your new loan.
Fannie Mae states: “Most transactions will not receive an appraisal exemption offer, meaning that they require an appraisal by a qualified residential appraiser to determine market value. Today, there are appraisal exemptions and several different home loan programs that don't require an appraisal to refinance, which are known as simplified refinances. In addition, closing costs can be included in the new VA loan, or you can opt for a slightly higher interest rate through a no-fee refinance. If you don't think the value of your home has increased or you're not looking for a cash-out refinance, it might be best to avoid an appraisal. However, you must demonstrate a “tangible net benefit” obtained by refinancing an Adjustable Rate Mortgage (ARM) mortgage to a fixed mortgage or by reducing the principal payment and interest (plus the annual Mortgage Insurance Premium (MIP)) by at least five percent. Initially, this was an option for certain types of refinance transactions, but now it's also good for buying some homes.
Both Fannie Mae and Freddie Mac, the agencies that regulate compliant lending, offer a way to bypass the appraisal process. The appraiser gets paid to value your home, but it has nothing to do with determining if you qualify for a mortgage or refinance as a result of your estimate. While Fannie and Freddie are now also exempting appraisals from loans for purchases, it's still a small percentage of transactions. Therefore, a lender may insist on a traditional appraisal unless it is clear that you have a large amount of accumulated capital. Refinancing a mortgage may be worthwhile if you qualify for a lower interest rate that allows you to lower your monthly payment and save money over the life of the loan.
The value of your home is a key variable for any mortgage loan, whether you're buying or refinancing. If your appraisal report shows an LTV of 85%, you'll still need private mortgage insurance (PMI) for your new loan. The savings from even a small decline in the interest rate on your new mortgage could more than offset the cost of the appraisal.
