Question: I am in the process of refinancing my home loan. The lender called the other day and said they would be sending an appraiser out to my home. What effect, if any, will the appraisal have on my interest rate?
Answer: The appraised value of your home certainly can alter your interest rate. Basically, the more equity you have in your home, the better your loan rate and terms. Why? Because the lender thinks you will be less likely to default on a loan if you have a lot of equity in the house. What's a lot of equity? For an owner occupied home, the lender would like to see 20% or more equity. So if the home is valued at $100,000, the lender will loan you up to $80,000 and still give you the best rate and terms. That is not to say the lender will not loan you more, but, in most circumstances, the rate and terms will be the most advantageous at this 80% number. So back to your question - the appraisal certainly can affect your interest rate. If you want to refinance $80,000 of debt, you hope the property appraises for at least $100,000. If not, you may need to accept a less advantageous rate or term, or you may need to borrow less money.
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