Home Appraisal Basics

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You know what you paid for your home and how much the house next door costs. You know what you've put into renovations. But what you may not know is how much a lender is willing to finance when your house is for sale, if you're in the market to refinance or if you're considering adding a home equity line of credit (HELOC). That's where the appraisal comes in. Appraisals can also be used to divide property during a divorce or estate settlement, determine a home's value in order to remove mortgage insurance or set a value for tax purposes. In real estate transactions, appraisers determine a property's fair market value, which is the most likely price for which it would sell in a free market. The lender then uses this information to determine how much to loan against the property whether it's an outright sale, a refinance or a home equity. If you aren't familiar with the appraisal process, it helps to see how professionals arrive at the numbers that help lenders arrive at a figure. Here's a look at how they work. The Basics Since the government controls how appraisals are conducted, they're awash in regulations. As a general rule in selling a home, the appraiser is hired by the lender and the lender passes the cost along to the buyer, usually in the application fee. In a refinancing or when obtaining a home equity, the homeowner pays for the appraisal. An appraiser compares the sale price of a home against similar homes that have recently sold in the same area. These are called "comparables." Although there is no set rule, when a lender agrees to finance a mortgage, he wants to see a minimum of three comparables. Appraisers try to make an apple-to-apple comparison. For example, an appraiser would not contrast a 1,700- square-foot ranch with a two-story Cape Cod that's twice the size. The cost of an appraisal varies by region, but a buyer should reasonably expect it to add from $300 to $500 to closing costs. A homeowner who refinances or adds a second mortgage is responsible for the appraiser's fee and may be asked to pay upfront. Appraisals Estimate Value John Bredemeyer of Realcorp, an Omaha, Neb., appraisal firm, says the appraisal is not an analysis of the agreed-upon sales price but an opinion of the property's value. "The price is the part that the buyer and seller agree on and it can be the same, higher or lower than the market value," he says. The appraisal, on the other hand, is an estimate of the most likely price the property would fetch under normal market conditions and it is used to determine how much money you can borrow with the house as collateral.

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