Home Appraisal Basics

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 if 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 an 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 lend 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 with that of 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 $300 to $500 to closing costs. A homeowner who refinances or adds a second mortgage may be asked to pay the fee up front.