Whether you are getting a mortgage for a new home or refinancing your existing mortgage, you’ll most likely need a home appraisal.

The Purpose of the Appraisal

Home Appraisal BasicsA real estate appraisal provides you and your lender with an independent evaluation of your home’s market value under normal circumstances.

The lender uses the appraisal to protect its interests by verifying the value of the mortgage loan’s collateral, which is your home.

Knowing this number also helps you as a homeowner. You can compare the home’s appraised value with its proposed sales price and mortgage loan amount. As a result, you can avoid paying too much for the home or borrowing more than the property is worth.

The Appraisal Process

Generally, your lender will hire an independent property appraiser, who is certified and licensed by the state but complies with federal standards. (Check out professional designations of appraisers at the Appraisal Institute’s website.)

As a consumer, you will most likely pay the appraisal fee, which is generally included in the closing costs or application expenses. Fees vary by region but a home appraisal cost may range from $250-$400.

House AppraisalThe real estate appraiser gathers and analyzes information from various sources to develop a valuation of your property. This process should include an inspection of your home’s interior and exterior. In addition, he or she will identify and compile a list of comparable properties (aka “comps”) that have sold recently.

To a certain extent, the appraisal of your home depends on recent sales prices in your area. The value takes into account the differences between your home and the comps. Adjustments are made for both exceptional features and deficiencies.

For example, if your neighbor’s home recently sold for $175,000, then you might reasonably assume that your house is worth a similar amount. However, if your neighbor recently remodeled his kitchen, and your kitchen needs repairs, then the appraiser may deduct $35,000 from the value of your home. At the same time, the appraiser may add $15,000 in value to your property if its main living areas are significantly larger.

To get an idea of what features are relevant to the house appraisal process, look at the Uniform Residential Appraisal Report (Freddie Mac PDF).

In addition to the valuation using comparable sales, the appraiser also calculates the property’s replacement value. This number is based on the value of the land and cost associated with home construction. Using professional judgment, considering sales comps and cost factors, the appraiser develops an appraised value of the property.

Depending on the regulations that apply to the mortgage loan, a standard (aka full) appraisal may be completed as described. Alternatively, if allowed, an exterior-only or short form appraisal may be done.

Home Appraisal Tips

  • When you are buying or refinancing a home, you want to get an honest, unbiased opinion of its value. However, valuations are somewhat subjective even when strict guidelines are followed. Recent comparable sales of houses in your neighborhood may be skewed for some reason, affecting your home’s value.
  • For the best and most accurate results, ask your lender to hire an appraiser who is familiar with housing trends in your area.
  • Even before you make an offer or start the refinancing process, get a rough idea of the value of your home. Check county records online to view property tax assessment values, which are often lower than appraised values. Tap online home appraisal resources such as realtor.com’s home valuesZillow’s Zestimate tool, or similar sites; note that these values are often higher than a certified appraisal.
  • Knowing how the house appraisal process works and the components of the appraised value can help you make a good purchase and mortgage borrowing decision.
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