Is it necessary to have an appraisal to get a HELOC?
A Home Equity Line of Credit is a type of revolving credit that is secured by the equity you have built up in your home. Lenders use appraisals in order to get a current monetary valuation of the property and to determine the amount of equity you have in your home, although HELOC appraisals are often shorter and less expensive than full appraisals. The appraisal is used by the lender to decide if you qualify for a HELOC and what your maximum credit limit will be.
Key Points:
Most HELOC lenders require an appraisal to determine the current market value of your home, your current equity, your creditworthiness, and your maximum credit limit
HELOC appraisals are often less extensive than those for a traditional mortgage
Having an updated appraisal helps you understand your current property value and decide which HELOC is best for you
Lenders differ in the type of appraisal they require, which can vary from full, desktop, exterior-only, hybrid, and automated
HELOC appraisal basics
A home equity line of credit (HELOC) is a great way to take advantage of the equity in your home without having to sell or refinance. However, lenders need to know how much your home is worth before you can access the funds. This requires an appraisal, which is the process of providing an accurate estimate of your home’s value.
Thankfully, HELOC appraisals tend to be quicker and less expensive than full appraisals since they focus on just the area around your house. The process involves inspecting any necessary repairs and updating records for taxes, zoning, market conditions, and amenities surrounding the property being evaluated. With this information in hand, lenders are able to provide you with an appropriate loan amount based on your current equity.
What is a HELOC?
A HELOC, or Home Equity Line of Credit, is a versatile credit line that is backed by the equity accrued in your home. Equity is the current market value of your home minus any amount you owe on the house in the form of mortgages (primary mortgages and secondary mortgages). Unlike a traditional home equity loan which pays out as a lump sum, one-time payment at the start of the loan, a HELOC is a line of credit. With a line of credit, you withdraw funds as needed and only pay interest on the amount of the credit line you have used.
A HELOC also differs from a home equity loan in that it is divided into two loan periods. The first is the draw period. During this phase, you are able to draw funds from your credit line. Lenders vary in terms, but often you only pay interest during this time and do not need to pay down the principal balance in monthly payments. Typically you are able to choose to pay down the principal during this period, but some lenders charge prepayment penalties if you pay off or close out your loan during the draw period.
Following the draw period the loan enters the repayment period. During this period you can no longer withdraw funds and must make monthly payments on the principal and interest.
What is an appraisal?
An appraisal is the process of estimating the monetary value of a property. This is done by assessing the current condition of the home and comparing it to similar properties in the area to get an idea of its market value. Appraisals are important for a variety of reasons, including determining if you need to get a loan or refinance your existing mortgage. For HELOCs, an appraisal is necessary in order to determine the amount of equity you have in your home. HELOC appraisals tend to be shorter and less expensive than a full appraisals.
Do I need an appraisal to get a HELOC?
Yes, typically an appraisal is required in order to obtain a HELOC, however it is often a less detailed appraisal than necessary for a primary mortgage. To assess the amount of loan a homeowner can be awarded, lenders will need an accurate account of the value and condition of the property. This is typically done by a professional, independent home appraiser who holds no influence from either the borrower or lender’s side. It is important to have an exact appraisal in order to determine how much equity the borrower has in their home because it represents the difference between the appraised value and the remaining mortgage balance.
Lenders require an appraisal prior to approving a home equity loan or line of credit in order to ensure they are able to get back the amount of money being issued if ever needed. That is, the lender wants to be sure that they get their money back. In the case that you cannot repay the loan, they will need to foreclose on your home in order to regain their money. If they have lent you more than the value of your home, they will not be able to regain their investment.
Borrowers should be prepared for this additional process during their loan application. In some cases, depending on location and various other factors, lenders might charge fees for an appraisal. Nevertheless, this cost could likely be minimal compared to what having access to additional funds can do for you and your family.
Benefits of an appraisal
HELOC appraisals are typically much less expensive and involved than a traditional, full appraisal used when purchasing a home. Through this process, lenders can verify a homeowner's HELOC eligibility to determine how much they can borrow from their equity. A HELOC appraisal may actually benefit the homeowner in some cases by providing them with access to the equity that they did not previously have access to.
The appraisal process helps homeowners understand the fair market value of their home and what portion of the estimated worth is available as an equity line of credit. With this information, homeowners can take advantage of low-interest rates if they decide to use their HELOC towards debt consolidation, home renovation projects or any other financial goals. In addition to being beneficial for qualifying for HELOCs, having your property appraised can also help you track market trends and stay ahead of competition when listing your house on the real estate market.
Types of HELOC appraisals
Lenders have options on how to get an accurate property valuation. The appraisal value of your home will be used to calculate how much equity you have, and ultimately your HELOC credit limit. Borrowers who are looking to maximize their access to cash should try to get the highest appraisal possible. Depending on your lender, you may do a complete in-person appraisal or choose a less extensive option.
Full appraisal
When you think of home appraisals, you probably think of the full, copletem appraisal. This is the standard option for primary mortgages and is used for many home equity loans and HELOCs. A full appraisal includes a physical examination through the interior and exterior of the house with the homeowner to evaluate its features and condition. After inspecting the home, the appraiser does research on comparable properties that have been sold in recent months to see what similar houses have sold for in order to estimate a fair market value for your property.
The full appraisal helps lenders assess potential risks when lending money. Homeowners also benefit from full appraisals since it gives them an idea of their home’s current market value and whether or not they may qualify for higher loan amounts due to their home’s worth.
Desktop Appraisal
A desktop appraisal done by a professional appraiser is a quicker and less expensive way to value a home. Data is gathered electronically and compiled by sources such as home listing websites or proprietary information. This data is used to help determine a reasonable market value.
Exterior-Only Appraisal
An exterior-only or drive-by appraisal is when an appraiser assesses a home by checking out only the external features. Using public records and other available information, such as online listing photos and services, they fill in the remaining details of the interior components of the home. Homeowners may prefer to have a full or hybrid appraisal if they have recently done interior renovations or improvements that significantly add to the home's value.
Hybrid Appraisal
A hybrid appraisal combines information in the form of photographs and data collection from an individual other than the appraiser. This information is shared with the appraisal who then analyzes the data in comparison to local comps in the area. Using this method can speed up the appraisal process and costs less than a complete appraisal.
Automated Appraisal (AVM)
An automated valuation model, or AVM, is becoming a more common way to conduct appraisals, especially in the absence of a home sale (that is, for home equity loans and mortgage refinancing where the property does not change hands). An automated valuation model (AVM) is a computer program designed to estimate the market value of a property without the need for human analysis. It works by taking data from publicly available sources such as tax records, sales records, and other databases in order to compare properties with similar features that have recently sold and come up with an estimated value (Think: Zillow's Zestimate). An AVM is supposed to give an unbiased opinion that accounts for factors like location, size, age, and condition, giving a more accurate idea of the property’s market worth than manually assessing it would allow.
Homeowners may prefer to have a full appraisal if they have recently done renovations or improvements that significantly add to the home's value and are not available via public records. While AVMs have been found to be quite reliable, they still do not provide the level of detail that a full appraisal will provide. However, they are the fastest way to get a reliable home valuation at the lowest cost.
Costs of appraisals
The cost of an appraisal will depend on what type of appraisal your lender requires and your geographic location. Typically, a full, in-person appraisal costs between $200-$600. Desktop, hybrid, and exterior-only appraisals require significantly less time work, and are therefor less expensive than complete appraisals. Automated valuation models are both the quickest and lowest cost for home appraisals.
Modern HELOCs, such as that offered by Figure, find that using an AVM to appraise home value benefits both the lender and borrower. Because a HELOC is a loan and not a primary mortgage, an approximate value is adequate for valuation purposes. Using an AVM speeds up the lending process, allowing Figure to fund loans in as little as 5 days and keeps borrower costs down.
The Takeaway:
A HELOC is an intelligent way to borrow against your home equity to complete personal projects, meet financial goals, and better your life. In order to obtain a HELOC most lenders require some form of appraisal to determine your home value and lending limit.
When it comes to the type of appraisal needed for a HELOC, the answer depends on a few factors. If you’ve done interior renovations or improvements that significantly add value to your home, you may want to go for a full appraisal. However, if time and cost are of the essence, an automated valuation model (AVM) may be the best choice. AVMs provide a quick and reliable estimate of home value, while still being accurate enough for loan purposes. Ultimately, the decision is up to you and your lender, who will weigh the pros and cons of each approach in light of your specific situation.
