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Are Appraisals Needed for Home Equity Loans?

We’re not saying your home is a literal ATM, but if you take out a home equity loan or home equity line of credit (HELOC), you can withdraw from the equity locked inside your home to pay for home improvements, medical expenses or school expenses or to consolidate your debt. 

Of course, the process isn’t as simple as punching in a few numbers and watching cash spew out of a slot. Like using an out-of-network ATM, home equity loans and HELOCs have fees. There are a variety of fees and closing costs, including the appraisal fee.

Fortunately, lenders are more relaxed about appraisals for HELOCs and home equity loans. These appraisals are usually less expensive than an appraisal for a home you plan on purchasing and more flexible than a traditional in-person assessment of your property.

Whether you use a home equity loan or HELOC to tap into the cash in your home, your lender will likely require a home appraisal. We’ll explore the different types of appraisals you’ll encounter and explain how you might be able to waive the appraisal altogether.

Is an Appraisal Required for a Home Equity Loan or HELOC?

Most home equity loans and HELOCs require an appraisal.

Home equity loans and HELOCs let you borrow money against your home’s value. To determine your maximum borrowing limit, your lender needs to know how much your property is worth. And that’s where the appraisal comes in.

Let’s say your home appraises for $250,000, and your lender approves you for a HELOC capped at 80% of your loan-to-value (LTV) ratio. Your LTV is your home’s appraised value minus the amount you owe on your mortgage. If you owe $100,000 on your mortgage, you can borrow up to $120,000 (80% of $150,000).

What Kind of Appraisal Do You Need for a Home Equity Loan or HELOC?

The type of appraisal you’ll need for a home equity loan or HELOC will depend on your lender. Some lenders will require a traditional in-person walk-through, but many will accept these alternative appraisals: 

Desktop appraisal

Desktop appraisals cut out the in-person visit. A desktop appraisal is completed at the desk of a professional appraiser using public property records and other available third-party data. 

Automated valuation model (AVM)

An AVM is a computer program that uses a specific formula to estimate a home’s value using local area information, basic property characteristics and comparable home sale prices in the area. 

Drive-by appraisal

A drive-by appraisal is an in-person appraisal of a home’s exterior (not the interior). It includes an analysis of the home’s property records and comparable home sales in the neighborhood.

If you know your lender is scheduling a drive-by appraisal, it may be a good idea to spruce up the outside of your home. Adding a flower box or painting your front door may help boost your home’s appraised value.

Hybrid appraisal

A hybrid appraisal divides the in-person appraisal and the data analysis of your local housing market data between two parties. A third-party inspector handles the in-person inspection, and the licensed appraiser focuses on the local data analysis to estimate your home’s fair market value. 

Full appraisal

A full appraisal involves a licensed appraiser visiting your home to inspect it inside and out and from top to bottom. The appraiser will document your home’s condition and note any upgrades on the property. The appraiser will compare your home to similar properties recently sold in the area and use their data and comp analysis to reach an appraisal value for your home.

Does a No-Appraisal Home Equity Loan or HELOC Exist?

Most lenders will require at least a desktop appraisal, though some may make exceptions and waive the appraisal.

You may qualify for a no-appraisal home equity loan or no-appraisal HELOC if:

  • A previous appraisal was performed within the last 60 – 180 days.
  • You are borrowing less than $100,000.
  • You have an excellent credit score and have worked with the lender before.

Some lenders may offer no-appraisal home equity loans or HELOCs for other reasons, but these loans may have additional fees and higher interest rates.

Do You Pay for the Appraisal at Closing?

Most lenders will add the appraisal fee to your closing costs. In other cases, you may pay for the appraisal before closing. Sometimes the appraisal fee is folded into the loan and gets paid off over time.

How and when you pay for an appraisal will depend on the type of appraisal performed and how your lender decides to bill you.

Don’t Fear the Home Appraisal

You can leverage your home equity to finance home repairs, pay down high-interest debt or cover college tuition. If your lender requires an appraisal for your home equity loan or HELOC, it will likely be less expensive and less involved than a traditional appraisal to buy a home.

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