Is It Worth Making Repairs Before Getting A Home Appraisal?
When you are looking to refinance, there are a lot of good questions to ask. Whether or not to do repairs on your home before a home appraisal is a very good one. By asking this question, it is clear that you know a home appraisal is part of the refinancing process and that the value of your home is incredibly important for getting good loan terms. But, how does a home appraisal affect your refinancing options? Well, there are three major parts to your financial picture that lenders will look at when they are building a loan estimate for you: your credit score, your DTI (debt-to-income) ratio, and the value of your property. While you should be concerned with keeping your credit score high and your DTI ratio low, making sure your home is valued appropriately is just as, if not more, important. So, let us look at what scenarios would decide if you should do repairs on your home before a home appraisal.
As you know, when you refinance, the bank will appraise your home. They do this to make sure the property is worth more than what you owe on the loan. If you are concerned that your home will not appraise for the loan’s value, you should fix up the home to increase the value. If you are confident the mortgage is well below the property’s value, you do not need to do any repairs. That is the simplest way to look at it, and it makes sense when we look more into what the home appraisal is telling the lender about your home and the potential loan. To get a bit more specific, they will be looking at your LTV ratio or your Loan to Value ratio. Your LTV ratio gets calculated by dividing your mortgage amount by the home appraisal value and is expressed as a percentage. Let us look at an example of an LTV ratio in action, and then we will talk about what a good and bad LTV ratio looks like.
- You have a mortgage amount of $150,000 on a home you purchased, valued at $200,000 at the initial purchase. The LTV ratio of your home now, if still valued at its sale price, is 75%. Now, you are refinancing and one of three scenarios will be applicable. The LTV is the same, under $200,000, or above $200,000.
- If your home appraisal comes back at $180,000, your new LTV ratio is 83%.
- If your home appraisal comes back at $210,000, your new LTV ratio is 71%.
So, when lenders look at our LTV ratio, they are trying to determine the level of risk involved in giving you a loan. They want you capable of paying your loan because it is safer than you defaulting and going into foreclosure. Lenders do not want risky loans, and the higher your loan-to-value ratio is, the more risk it has for the lender. A high LTV ratio may not stop you from getting a loan, but it will affect your interest rate. In our scenario above, we have three percentages that may be acceptable to a lender, but being above 80% for the LTV ratio may cause you to pay PMI or private mortgage insurance. PMI can cost from two to five percent of your loan on top of your mortgage’s monthly payments. This is one of the reasons that makes knowing the value of your home is immensely important; the purpose of a refinance is typically to save you money, whether it is through a cash-out, a change in how long it will take to pay off, or lower monthly payments.
So, when do you do repairs on your home? You do repairs if you think that the LTV ratio of your home will be high. You want to avoid PMI and lower your interest rate because to save you money. In the interest of saving money, you probably do not want to spend too much on repairs. Three simple changes you can make to help your appraisal are tidying up, working on the curb appeal, and making small repairs. Remember that an appraiser is a third-party professional, but they are also a person. A lot of minor problems can add up during an appraisal. Putting away everyday clutter and making the house look nice will help greatly during the appraisal process. If there are small chips in paint, broken cabinet handles, similar issues that are quick fixes, it would be cost-effective to fix them. Next, look outside, as your curb appeal will be the first thing an appraiser sees, and making a positive first impression can help. Take a look around the front yard for anything that can be removed to make it look cleaner, and you will have helped your appraisal.
When you are going through a refinancing of your home, you are typically aiming to save money in one way or another. Knowing the value of your home and how to improve that value in small ways can help give you a better interest rate and save you money.
