Home Appraisals During Refinancing What to Expect
When you refinance your mortgage, your lender needs to know your home's current market value to determine how much they're willing to lend. This is where a professional appraisal comes in – a crucial step that can make or break your refinancing plans.
Why Lenders Require Appraisals for Refinancing
Lenders use appraisals to protect themselves from lending more than a property is worth. Since your last mortgage, your home's value may have changed due to market conditions, renovations, or neighbourhood developments. The appraisal provides an independent, professional opinion of your property's current fair market value.
Most Canadian lenders will order an appraisal when you're refinancing more than 80% of your home's value, or when you're switching to a new lender. If you're staying with your current lender and borrowing a smaller amount, they might waive the appraisal requirement and use an automated valuation model instead.
The appraisal also helps determine your loan-to-value ratio, which affects your interest rate and mortgage terms. A higher appraised value could mean better borrowing options, while a lower-than-expected appraisal might limit your refinancing choices.
The Appraisal Process Step by Step
Your lender will hire a licensed appraiser who specializes in your area. You typically can't choose the appraiser yourself – this independence helps ensure an unbiased valuation. The appraiser will schedule a visit to your home, usually within a week or two of your refinancing application.
During the visit, which usually takes 30 to 60 minutes, the appraiser will measure your home, photograph each room, and note the condition of major systems like heating, plumbing, and electrical. They'll also document any recent renovations, upgrades, or maintenance issues they observe.
After the inspection, the appraiser researches recent sales of comparable properties in your neighbourhood. They'll analyze at least three similar homes that sold within the past six months, adjusting for differences in size, condition, and features. The final appraisal report, which your lender receives within a few days, includes their professional opinion of your home's current market value.
Factors That Influence Your Home's Appraised Value
Location remains the most significant factor in your home's value. The appraiser considers your neighbourhood's desirability, proximity to schools and amenities, and recent market trends in your area. They'll also look at your specific lot size, street appeal, and any unique location advantages or disadvantages.
Your home's physical condition and features heavily influence the appraisal. Updated kitchens and bathrooms, newer flooring, fresh paint, and well-maintained systems all contribute positively. The appraiser will note the age and condition of major components like your roof, furnace, and windows.
Recent renovations can boost your appraised value, but not always dollar-for-dollar. To illustrate, if you spent $30,000 on a kitchen renovation, the appraisal might reflect a $20,000 increase in value, depending on the quality of work and how it compares to other homes in your neighbourhood.
Preparing Your Home for the Appraisal
While you can't dramatically change your home's value before the appraisal, you can present it in the best possible light. Clean and declutter every room, fix minor issues like leaky faucets or squeaky doors, and ensure all lights work. Good first impressions matter, even to professional appraisers.
Gather documentation of any recent improvements or renovations. Receipts, permits, and before-and-after photos help the appraiser understand the quality and scope of your upgrades. If you've replaced major systems like your furnace or roof, make sure these improvements are visible and well-documented.
Consider providing the appraiser with a list of recent comparable sales in your neighbourhood, especially if you believe there are better comparables than what might appear in their initial search. While they'll do their own research, additional information about unique features or recent sales can be helpful.
What Happens If the Appraisal Comes in Low
A low appraisal can complicate your refinancing plans, especially if you were counting on a specific amount of equity. If the appraised value is lower than expected, you might not qualify for the refinancing amount you wanted, or you may need to accept different loan terms.
You have several options if you disagree with a low appraisal. You can ask your lender about ordering a second appraisal, though you'll likely pay the additional cost. Some lenders may consider a reconsideration of value if you can provide compelling evidence that the appraisal missed important comparable sales or property features.
Alternatively, you might need to adjust your refinancing plans. This could mean borrowing less money, paying down more of your existing mortgage, or exploring different refinancing options. Remember that appraisals reflect market conditions at a specific point in time – if you wait and try again later, market changes could result in a different valuation.
Key Takeaways
- Lenders require appraisals for most refinancing to determine current property value and loan-to-value ratios
- The appraisal process involves a home inspection and comparison to recent neighbourhood sales
- Location, condition, and recent improvements are key factors affecting your home's appraised value
- Preparing your home and documenting improvements can help ensure the best possible appraisal outcome
- Low appraisals may require adjusting your refinancing plans or considering a second opinion
Disclaimer: This article is for informational purposes only and does not constitute financial, legal, or mortgage advice. Any numbers, rates, or scenarios mentioned are examples only and may not reflect current market conditions. Always consult a licensed mortgage professional or financial advisor for guidance specific to your situation. If you are looking for help with a mortgage, The Local Broker can connect you with a licensed professional.
