Mortgage rates have reached historic lows in the past year, in part due to the ongoing effects of the COVID-19 pandemic. Not only has this made homebuying attractive, but many existing homeowners have taken advantage of the low rates by refinancing their homes. In fact, refinance originations in the first half of 2021 were 33% higher than in the first half of 2020, according to Freddie Mac.
One common requirement of a refinance is an appraisal, which helps lenders ensure your house is actually worth the amount they’re lending you. Appraisals, like other refinance closing costs, are typically paid for by the homeowner. For those wanting to avoid the extra expense and hassle of getting an appraisal, a no-appraisal refinance may be available in certain situations. While skipping the appraisal could save you time and money on your refinance, this option might not be right for everyone.
Here’s what to know.
Why Do Most Refinances Require an Appraisal?
When you buy or refinance a home, your lender will typically require an appraisal. During an appraisal, an appraiser will visit your home to analyze the condition of the home, the neighborhood it’s in, the square footage, recent comparable home sales, and more. Using that information, the appraiser determines what they believe the house is worth.
The reason lenders typically require an appraisal before they’ll approve you for a new mortgage or a refinance is to ensure they’re lending you an appropriate amount of money.
“Since a refinance is still considered a new loan (that’s replacing an existing one), lenders want to ensure the value is sufficient compared to the new loan amount,” says Rebecca Richardson, an industry blogger and senior mortgage consultant for the online mortgage company Wyndham Capital.
Lenders, as well as government-sponsored mortgage companies like Fannie Mae and Freddie Mac, have requirements around the maximum loan-to-value ratio (LTV) for a home. LTV is calculated by dividing your total loan value by your home’s property value. For a standard refinance on a one-unit home that’s the homeowner’s principal residence, the maximum allowable LTV is generally 97%, according to Fannie Mae. For a cash-out refinance, it’s generally 80%. The appraisal helps lenders ensure that they’re staying within these limits.
But the appraisal can also benefit the homeowner. If the appraisal determines that your home has increased in value — thus increasing your home equity — you could be eligible to get a lower interest rate, take out a larger amount with your cash-out refinance, or drop private mortgage insurance (PMI).
What Is a No-Appraisal Refinance
While appraisals are required by the lender, they’re paid for by the homeowner. The average cost of an appraisal is about $348, with most homeowners spending between $313 and $419, according to the homeowner services digital marketplace HomeAdvisor. But in some cases, a homeowner may qualify for a no-appraisal refinance, which eliminates this step, as well as the added cost.
“Historically, the most common no-appraisal refinance comes from what are known as streamline refis,” says Robert Heck, VP of mortgage at the online mortgage marketplace Morty. “Those are most common with FHA or VA loans, which are government-backed, not the conventional loans.”
But more recently, no-appraisal refinances have become an option for homeowners refinancing conventional mortgages. In this case, a homeowner receives what’s called an appraisal waiver from Fannie Mae or Freddie Mac that allows them to skip the appraisal step of their refinance.
“The appraisal waiver is something Fannie Mae and Freddie Mac give on homes when they have enough data in their system about previous appraisals and home values, where they believe they don’t need another appraisal,” Heck says.
How Do You Get a No-Appraisal Refinance?
You may be eligible for a no-appraisal refinance if you currently have an FHA loan or a VA loan and qualify for a streamline refinance. To qualify for this type of refinance, you’ll have to meet certain requirements set by the Federal Housing Administration or the Department of Veterans Affairs. If you want to get one of these streamline refinance loans, you should apply directly with an FHA or VA-approved lender.
But even those who don’t have government-backed loans may still be able to get a no-appraisal refinance under certain circumstances. Borrowers with conventional mortgages may qualify for an appraisal waiver from Fannie Mae or Freddie Mac that allows them to skip the appraisal.
Unfortunately, you won’t know whether you qualify for an appraisal waiver at the time you apply for a refinance. Instead, once you’ve applied, your lender can submit a loan case file to Fannie Mae or Freddie Mac to see if you qualify.
The requirements for an appraisal waiver from Fannie Mae include:
- The lender must use Desktop Underwriter®, Fannie Mae’s automated mortgage underwriting system
- The house must be a one-unit property (including condominiums)
- The purchase price or estimated value of the mortgage provided to Desktop Underwriter must be under $1,000,000
- For a standard refinance, the LTV must not exceed 90% for principal residences and second homes, and 75% for investment properties
- For a cash-out refinance, the LTV must not exceed 70% for principal residences, and 60% for second homes and investment properties
The requirements for an appraisal waiver from Freddie Mac include:
- The lender must use Loan Product Advisor®, Freddie Mac’s automated mortgage underwriting system
- The house must be a one-unit property (including condominiums)
- The house must be a primary residence or second home (investment properties are ineligible)
- The purchase price or estimated value of the mortgage must be under $1,000,000
- You can’t have already obtained an appraisal in connection with the refinance loan
- For a standard refinance, the LTV must not exceed 90% for primary residences or second homes
- For a cash-out refinance, the LTV must not exceed 70% for primary residences and 60% for second homes
It’s important to note that even for borrowers who meet these requirements, the majority of homes aren’t eligible for an appraisal waiver, meaning that getting a refinance will likely still require an appraisal.
Are No-Appraisal Refinances Worth It?
Whether a no-appraisal refinance is worth it depends on your specific situation. Like many things, there isn’t a one-size-fits-all solution. It really depends on what you’re looking to get out of the refinance, says Heck.
“Typically speaking, an appraisal waiver is going to be something we recommend if the terms of the refinance are already the best for the consumer,” Heck says. “If that’s the case, then not adding an additional layer of risk for the consumer is a benefit. Because at the same time as wanting to get a higher appraised value, there’s always the risk of an appraiser coming back with a lower appraised value than what’s already being used.”
Heck notes that the predictive modeling that Fannie Mae and Freddie Mac use to grant these appraisal waivers is fairly accurate. And, he adds, the appraised value doesn’t necessarily need to be perfect, as long as the homeowner can secure the terms that make the refinance beneficial.
On the other hand, there are some situations where it may be better to get an appraisal.
For example, perhaps your home has increased in value recently and you want to take advantage of your increased home equity by using a refinance to drop private mortgage insurance or take cash out of your home. In that case, you may be better off getting an appraisal to ensure your home’s true value is reflected in your refinance. Because of how rapidly the real estate market has changed over the past year and a half, Fannie Mae and Freddie Mac’s data may simply not have caught up.
“Especially in the past year, the housing market has been just so crazy, and sometimes things get a little skewed,” Heck says. “That’s when a consumer should take a closer look to understand just what the options are on the table.”
So while the savings of both time and money can be a benefit for homeowners, the answer of whether an appraisal waiver is worth it depends largely on your situation and why you’re refinancing.
Other Considerations when Applying for a Refinance
Refinance loans have become increasingly popular over the past year as mortgage rates have been at all-time lows. And while current rates aren’t as low as they have been at certain points throughout the pandemic, they’re still low by historical standards. As a result, refinancing is still a great option for many homeowners.
Before refinancing your home, there are a few things to consider. The most important factor to consider when deciding whether to refinance is your break-even point. The break-even point is when the savings provided by a refinance exceed the closing costs associated with it. Depending on your situation, the break-even point could be relatively short, or it could be several years.
Ultimately, you have to ask yourself whether you plan to be in the home long enough to reach the break-even point and finally start to see savings from your refinance. For people who only plan to be in the home for another year or two, the answer may be no. But for many other homeowners, it could be worth it. Our mortgage refinance calculator can help you determine whether refinancing is worth it for you.
When you’re considering a refinance, it’s also important to shop around for the best deal and compare your current interest rate and loan terms to those you’re being offered. Remember that you don’t have to refinance with your current lender.
“Not all lenders — and rates — are created equal,” Richardson says. “Homeowners should weigh their lender options on more than just the rate. Look at total costs being charged by the lender, get at least two estimates, and check reviews for a sense of how the process will be.”