How Do Appraisals Affect Your Mortgage?

A home appraisal can affect the amount you’re approved to borrow with a mortgage and the interest rate you receive.

When buying a home, you want a home to appraise for the purchase price or higher to avoid having to make a larger down payment or negotiate a lower price with the seller. A home that appraises for less than the purchase price could otherwise lead to the deal falling through.

When refinancing, you ideally want a higher appraisal value than the balance on the mortgage you’re applying for. The appraisal influences how much equity you have to borrow against. The higher a home appraises compared to your remaining mortgage balance, the more equity you have. You can then use your home’s equity to get cash-out or open up a new line of credit with a home equity line of credit (HELOC).

Here’s a closer look at how appraisals affect your mortgage and why.

Determines loan eligibility

When you finance a home, the property itself serves as collateral for the mortgage. The appraisal confirms the home’s appraised value so the lender can be sure they’re not lending more than the property is worth. If you default on your loan, this value helps the lender recover their investment by selling the home.

Sets your interest rate

Lenders use a measurement called loan-to-value (LTV) ratio to compare the amount you're borrowing against the value of the property, whether you own the home or are buying it.

A smaller gap between the appraised value and the loan amount means the lender is financing a larger portion of the home’s value and bears more risk. This can lead to a slightly higher interest rate, mortgage insurance, or additional loan requirements to protect their investment. When a home appraises at or exceeds the purchase price (or loan amount on a refinance), there is less risk to the lender, which can lead to more favorable loan terms, including a potentially lower interest rate. 

For instance, say you’ve made a $375,000 offer on a home with a 20% down payment ($75,000). In this case, your loan amount would be $300,000, and your LTV ratio would be 80% — enough to avoid PMI and qualify for a lower interest rate.

Let’s say the home then appraised for a higher value than the price you offered: $420,000. To stay at 80% or less LTV, you’d need to come up with an additional $9,000 to increase your down payment from $75,000 to $84,000 (20% of $420,000).

Let’s say that instead the home appraised for a lower value than the price you offered: $350,000. In this case, you’d need the seller to agree to lower the price from $375,000 to $350,000. If that happens, you’d put down 20% of $350,000, or $70,000, instead of 20% of $375,000 ($75,000).

Influences your down payment requirements

Since your lender can only finance up to the appraised value, you want to avoid a low appraisal. Ideally, you want the home to appraise at or above the price you’ve agreed to pay. That keeps your loan amount, down payment and closing timeline predictable. 

If the appraisal comes in lower

With a low appraisal, you’ll need to cover the difference between the purchase price and appraisal amount in cash. For instance, if you offer $300,000 for a home but it appraises at $280,000, your lender will base your loan on $280,000. Regardless of how much you initially planned to put down, you’d now need to put an additional $20,000 toward the down payment to close the gap or renegotiate the sales price with the seller.

If the appraisal comes in higher

With a high appraisal, you’ll gain instant equity — or ownership in your home. While your loan amount and down payment stay the same, your home is worth more than you’re paying for it. A home priced at $400,000 that appraises for $420,000 would net you $20,000 in equity, while your down payment and loan amount stay the same. This is a great head start for future refinancing or resale.

Decides your mortgage insurance

If you’re purchasing a home with an FHA loan or conventional loan with a down payment under 20%, you’ll be required to pay for mortgage insurance to protect the lender. Your LTV ratio, the difference between your mortgage amount and your home’s value, determines whether you’ll need mortgage insurance and for how long.

• Conventional loans: Borrowers with less than 20% down (LTV above 80%) pay private mortgage insurance (PMI). Once your LTV drops below 80%, either through payments or appreciation over time, you can request to remove PMI. (Note: Even if your mortgage is at 80% LTV, you can’t remove PMI if you aren’t current on your loan payments. You typically need to have held the mortgage for at least 2 years, as well.)
• FHA loans: These require mortgage insurance premiums (MIP) regardless of your down payment amount. Depending on the size of your down payment and loan term, MIP may last for the life of the FHA loan or terminate once you hit a certain point in your term — or, can be removed through refinancing once your LTV improves.

Confirms your refinance value 

When refinancing, a new appraisal establishes your home’s current appraised value. That value determines how much equity you have, what types of refinancing you qualify for and what rate you might receive.

For example, if your home originally appraised for $350,000 but is now valued at $425,000, that $75,000 in new equity could make you eligible for a cash-out refinance or help you secure a lower rate through a rate-and-term refinance. A stronger appraisal can also help you eliminate PMI and improve your loan terms overall.

Navigate home appraisals with confidence

In both home purchases and refinances, appraisals help determine how much a lender is willing to finance, how much equity you have in the home, and what kind of loan terms you might qualify for. By understanding how appraisals work and how they impact your mortgage, you’ll be better equipped to navigate the home-buying or refinancing process with confidence.

*Zillow Home Loans; an equal housing lender. NMLS #10287