(Updated January 2015)
Tapping into the equity in your home when you need cash can be a smart move. It offers potential tax savings, and second mortgage rates may well be lower than credit card interest rates. If you're thinking about borrowing against your home's equity, you should know how much equity you have to borrow against.
Your friendly realtor may be able to give you a market value for your home, and you may even know the amount that your neighbor sold his house for last year. Unfortunately, a lender isn't going to accept either of those figures. He's going to want an appraisal.
An appraisal is different from a home inspection. It won't tell you whether all the wall sockets are working, or whether the chimney is sound. It will, however, give a professional estimate of your home's market value.
The appraiser will look at your property and check sales figures for other homes in the same area. He will then adjust for differences between the homes. After a thorough examination, he will deliver an estimate of your home's current value.
The final report will include information on the home's flaws, such as a crumbling foundation, and a list of issues that might be dragging down the value of the home, such as poor street access.
What you'll pay
The price of an appraisal varies from market to market and is affected by the size and complexity of the job. A home with a guesthouse and a studio over the garage will cost more to have appraised than a standard three-bedroom, two-bath home. Count on spending at least several hundred dollars, no matter what type of place you call home.
Finding an appraiser
It used to be that you could hire your own appraiser, or that your lender could recommend one for you. Not anymore. New rules enacted since the housing market crash prohibit a lender or borrower from selecting an appraiser. Instead, one is likely to be provided for you by an appraisal management company.
The rule is intended to protect appraiser from pressure to over-value a home in order to qualify it for a loan. However, many in the lending industry now complain that the opposite is happening, that appraisers under-value a home in order not to be accused of inflating prices. In other cases, an appraisal company may assign an appraiser from some distance away who isn't familiar with the local market, and so may not get the appraisal right.
If you think your appraiser undervalued your home, you do have a right to challenge that appraisal or request a new one by a different appraiser. If you challenge it, you should be ready to provide evidence why you think the appraisal was wrong, including sales prices of comparable homes in your neighborhood and detail any particular factors that might enhance the value of your home compared to those around it.
Getting a copy of your appraisal
It used to be that lenders didn't have to share your appraisal with you or let you know how the value of your home was determined. New rules that took effect in early 2014 require that mortgage borrowers be given copies of their appraisal and of supporting documentation, including computerized valuations and other information used in estimated the home's value.
Unfortunately, these rules only apply to borrowers seeking to obtain a primary mortgage, either to buy a home or refinance an existing loan. They don't apply to home equity borrowers. However, the new rules do mean that lenders are now routinely providing this sort of information to borrowers, so you may be able to obtain it simply by asking. This gives you the opportunity to challenge any errors on the appraisal and insist on corrections, which can be helpful if the home value came in too low to support the loan you were seeking.
By knowing how much your home is worth in the eyes of a lender, you'll know how much equity is available for you to borrow when you apply for a second mortgage. If you're in need of money, this information can be invaluable.