You’ve decided to refinance and it’s been a few years since you bought your home. You want to pinch every penny possible, but know there are expenses when refinancing. One of those expenses may be a new appraisal – but not always.
As with most things in the mortgage industry, there are exceptions. Keep reading to learn when a new appraisal is required.
Why Would you Want a New Appraisal?
First, let’s start with the positive aspects of getting a new appraisal. Yes, it costs money, but it can be money well spent. Home values change often. If you happen to refinance at a time when values are high, you could get a higher loan amount.
If you don’t need the higher loan amount, the lower loan-to-value ratio (comparison of the loan amount to the home’s value) will be lower. A lower LTV allows lenders to provide lower interest rates and fewer fees.
Paying for the appraisal can pay off in the end. This is especially true if it helps secure a lower interest rate as that affects your loan for its entire term.
What Loans Need a New Appraisal?
Most typical refinance programs need a new appraisal. For example, if you have a conventional loan backed by Fannie Mae or Freddie Mac, an appraisal will be necessary. This is true whether it’s a rate/term refinance or a cash-out refinance.
FHA and VA loans only need appraisals in certain situations. First, if you want to tap into the home’s equity and increase your loan amount, an appraisal is required. The lender needs to make sure there is enough value in the home to increase the loan amount. FHA loans allow up to an 85% LTV and VA loans allow up to a 100% LTV on cash-out refinances.
Refinancing from a conventional loan into a FHA or VA loan, requires an appraisal. Even if you only need a rate/term refinance, both the FHA and VA consider it a cash-out loan. You must prove that you qualify for the loan, and this includes ensuring the value of your home is high enough.
What Loans Don’t Need a New Appraisal?
Believe it or not, there are a few cases that don’t need an appraisal. The FHA and VA both offer a streamline refinance option. With this option, you can refinance your outstanding principal balance plus any allowed fees, but that’s it. You can’t borrow more than you owe, taking cash out of the home’s equity.
The FHA or VA streamline option helps lower your loan’s interest rate or change the term. Both loans need you to prove a net tangible benefit. In other words, prove that it makes sense to refinance. The FHA and VA do this to prevent unnecessary refinancing since it costs money to do so every time.
Both the FHA and VA allow you to use your original qualifying factors for the refinance. This includes the original credit score, original home value, and original DTI (debt-to-income ratio). All you need to prove is that you benefit from the refinance and that you made your monthly mortgage payments on time for the last 12 months.
USDA Refinance Requirements
The USDA also has a streamline refinance option that doesn’t require an appraisal. If you are current on your USDA loan and refinance to lower the rate or change the term, an appraisal may not be necessary. To qualify for this program, though, your new interest rate must be at least 1% lower than your current interest rate. The FHA and VA streamline guidelines don’t specify how much you must save to qualify.
In most cases, an appraisal is necessary to refinance. If you happen to have an FHA, VA, or USDA loan and only want a rate/term refinance, you may be able to save some money by avoiding the appraisal. Talk with your loan officer to find out if it’s worth skipping the appraisal. You may find that knowing the home’s appreciated value can help lower the interest rate and costs of your new loan.