How traditional refinances work
Refinancing is a process that is very similar to the process used to buy a house with a loan. When you buy a house with a loan, you work with a lender to get a mortgage. You use the mortgage to pay for the home.
To get a mortgage, you must apply for it and meet the lender's requirements for issuing loans. You must also get an appraisal. Your lender requires an appraisal when purchasing a home. Most lenders also require an appraisal for refinancing. Refinancing involves most of the same steps as the process used for getting a loan to buy a house.
The process begins with an application. You fill out the application and submit it to the lender. The lender asks for additional documents and information, if necessary, and they process the loan application.
The lender also generally asks for an appraisal. If you meet all the requirements needed for the refinancing loan, the lender schedules a closing date.
When the closing date occurs, the lender pays off your original mortgage, which means you'll no longer have this loan. Instead, you'll have a new loan - the refinancing loan.
The refinancing loan comes with new terms, which means you'll have a new payment amount. You'll also likely have a different number of payments remaining.
Refinancing is the process of getting a new loan to replace the old one.
Reasons homeowners refinance
You might be asking: "Should I refinance my home?". To answer this, you might want to learn the common reasons that cause homeowners to refinance.
To get a lower rate
The first reason is to acquire a lower interest rate. When you got your mortgage, the lender assigned an interest rate to the loan. They probably based the rate on the current rates in the country and your risk level.
If you had poor credit when you got the loan, your interest rate might be a lot higher than necessary. Refinancing allows you to get a lower rate if lower rates are available when you refinance your loan.
To have more affordable payments
Secondly, people refinance to have lower mortgage payments. If you're struggling to pay your mortgage payments, you might need lower payments.
If you can't get lower payments, you could consider selling your house. The downside is that it takes time to sell a house through the traditional selling method.
If you choose a longer loan than what you currently have, it can reduce the monthly payments you must make. By doing this, you might have an easier time paying your bills.
To get cash out
People often do this to consolidate their debts or pay for home renovation projects.
To shorten their loans
People also choose to refinance their loans to shorten their mortgage loans. For example, if you owe 18 years on your mortgage, refinancing might allow you to shorten the loan to 10 or 15 years, knocking three to eight years off your loan payments.
While many people refinance for these reasons, you can also choose to do this for other reasons.
The basics of home appraisals
The question still remains—do you need an appraisal to refinance your home loan? The answer is yes in most cases. While there are times you might not, you will need one in most situations.
When you want to refinance, the lender will need to verify your home's value before issuing the loan. In fact, the refinancing appraisal tells the lender how much to offer for your refinance.
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If you owe more than your home is worth, you might have some challenges refinancing the loan. Lenders generally won't issue loans when the loan amounts are higher than the home values.
To settle the issue, your refinancing lender will require an appraisal. The appraisal process doesn't take long, but it does require an appraiser coming to your house.
While the appraiser is there, they will do several things:
- Measure your home to determine its square footage.
- Examine the condition of the home.
- Evaluate the features it offers.
After gathering all the information they need, the appraiser will complete the rest of the work at his or her office.
The remaining part of the appraisal process is locating comps. What is a comp, you might wonder? A comp is a home similar to yours. It's short for comparable.
Appraisers compare your home to homes recently sold on the market. The appraiser compares your home to the others by looking at several factors—sale price, square footage, and features.
When the appraiser completes these steps, they'll present the final appraisal report to you and the lender. It will show your home's appraised value and the way the appraiser determined it.
Why lenders require appraisals
The question you might have is why lenders require appraisals for refinances? There are several reasons most lenders need them, and here are the main ones:
To verify the home's value
An appraisal serves one main role—it tells the current value of a house. It's completed by an expert, which makes it reliable to lenders. Lenders need to know a home's value before issuing a loan.
In fact, the appraised value tells the lender if they should issue the loan, the amount they should issue, and several other things.
To determine how much to offer for your loan
The lender will carefully review the appraised value before approving your loan, and they will also use it to decide how much to offer you for the loan. Many lenders limit their loans to a specific percentage of a home's value. The percentage might be 80% to 96.5%.
If you want to take cash out through the refinancing loan, they'll base it on the appraised value and the percentage they offer.
To determine the risk level
Lenders also require appraisals to determine a person's risk level. Lenders must be cautious when issuing loans, so they typically assess a person's risk level before they approve loans.
An appraisal also helps a lender determine the risk level of a loan. A lender has less risk when issuing a loan for 80% of a home's value than 90%.
Ways to refinance without an appraisal
So, do you need an appraisal? The answer is yes. However, you might be able to refinance without one. To refinance without one, you'll have to search for a lender that doesn't require appraisals. There are lenders like this, but they aren't easy to find.
Another option to consider is selling your home instead of refinancing the loan. If you don't want an appraisal, is it because your home needs a lot of work?
If your home needs a lot of work, it might not appraise high enough. As a result, you might have trouble refinancing it. You could decide to invest some money in the property before refinancing it, but that could be costly.
A better option might be to sell the distressed property. A distressed property is a house that needs work. If you want to sell a house like this, you can ask a cash buyer for an offer.
Cash buyers purchase distressed homes all the time. The best part of selling to a cash buyer is that you won't have to refinance or do any work to the house.
Do you need an appraisal to refinance?
So, do you need an appraisal to refinance? In most cases, you will need one. If your appraisal isn't high enough, though, you might face some challenges as you try to refinance your home.
If you're having trouble affording your home, you might want to consider a completely different strategy. You could sell your home for cash instead of refinancing the loan in hopes that you can afford it afterwards.
Would you like to learn how much your house is worth when selling it for cash? If so, visit our site, and submit your address. You'll hear back from us soon with a cash offer amount that you can consider.