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What to Know About the Appraisal Before You Apply for a Home Equity Loan

Using your equity

If you’re looking to tap some cash to fund a home improvement project, consolidate debt, or cover an emergency expense, the financial reprieve you need could be at your front door. That’s because the average homeowner has $140,000 in available home equity, according to Black Knight, which could be accessed to fund financial goals you have on the horizon.

But first you need to find out how much equity you have in your home—which, in part, relies on getting your home appraised. To get an idea beforehand, try this quick back-of-the-envelope calculation: Your Home Value minus Your Current Mortgage Balance. Most lenders will let you borrow up to 85% of that equity. (With Discover Home Loans, you may be able to borrow up to 90%, and in some cases 95%).

So, how quickly and easily can you access your cash? One of the biggest holdups is often the appraisal for home equity loans. This fact may leave you wondering: Do all home equity loans require an appraisal? And, perhaps more important, are all home appraisals the same? What comes next are answers to all your appraisal questions—and maybe even a way to speed up the process.

Do all home equity loans require an appraisal?

In a word, yes. The lender requires an appraisal for home equity loans—no matter the type—to protect itself from the risk of default. If a borrower can’t make his monthly payment over the long-term, the lender wants to know it can recoup the cost of the loan.

An accurate appraisal protects you—the borrower—too. An inflated appraisal value can leave you owing more than a home is worth, which can cause a borrower to go underwater financially when it comes time to, say, relocate for a job promotion or repair damage after a natural disaster.

That said, there are several different types of home appraisals. Some are cheaper, faster, and easier to obtain than others. It’s up to your lender and in certain circumstances federal law which one is required. So, if you familiarize yourself with these different appraisal types, you could get ahead of the game.

The AVM: the fastest, easiest appraisal for home equity loans

Automated valuation method—or AVM—is a mathematical modeling technique that contrasts local property values and sales data to uncover a property’s expected market price. The estimates you see on popular real estate sites are examples of AVM assessments. Discover Home Loans also uses an AVM when devising an appraisal for home equity loans.

How an AVM works: An AVM pulls historical MLS data to uncover recent and historical average and median home sales data, as well as broader neighborhood trends, which are culled from income trends, nearby points of interest, and the ratio of owner-occupied versus investor owned properties.

The amount of available residential real estate data has exploded in recent years, particularly as more and more information is housed online. This means data aggregators and artificial intelligence (AI) algorithms have access to home-valuing information in real time and can swiftly make appraisal adjustments as new homes are bought and sold. This robust supply of time-sensitive data can sometimes replace the need for a full or walk-through appraisal requiring an interior inspection of the property, which often adds time and money to the home equity loan process.

The AVM is a fast and easy way to value a home, which means a homeowner can quickly find out how much can be borrowed, sometimes in a matter of a few short seconds.

Despite its more advanced technology, AVM can’t drive by to view the state of your home’s exterior or step inside and assess the value of your kitchen upgrade. (At least not yet! Thanks to recent photo and drone-based technology, some of this information is on the way.) Without the ability to capture that incremental information, you may want to have an extra conversation with your lender if special or unique qualities about your home could add significant equity.

Pro tip: To make sure your home is valued as favorably as possible, dig into your neighborhood’s data on the major online realtor sites or access your town’s public property records. Look for comps that may not be accurate (e.g., a rash of home additions that aren’t included in public home values) and prepare to discuss undocumented trends with your lender.

The “drive-by” hybrid offers a middle ground

Falling somewhere in between an AVM and walk-through appraisal, is a hybrid, called a drive-by appraisal. The method is officially known as a BPO, or a broker’s price opinion, and uses combination of both valuation types. What happens is an appraiser will pull up to your home and take exterior photos to assess the condition of your property and neighborhood.

This method is generally faster than the walk-through appraisal, but not as swift as the AVM method as it still takes time to schedule an appraiser’s appointment and wait for the report. A drive-by may establish an estimated value of a property, but it’s not as thorough as a regular, interior appraisal of a home, as it’s generally based on the view from the street.

Pro tip: For the most favorable result, boost curb appeal by trimming hedges, planting flowers, and even re-painting or replacing a front door before the hybrid appraisal is conducted.

A walk-through appraisal’s comprehensive approach

The most conservative lenders will require a full home appraisal for a home equity loan despite the expensive and more time-consuming process. Just like when you first purchased your home, this method requires you to pay for a mortgage-company approved appraiser, who will identify your home’s specific upgrades, deficiencies and condition compared to neighboring homes. This fee can be in the several-hundred-dollar range. (Discover Home Loans does not charge a fee for the AVM appraisal method.)

The upside is that an appraiser can take note of any upgrades you’ve made on the home and can easily include the value of each in your appraisal report, as well as do a more comprehensive review of your entire property. You should plan to be home during the appraiser’s assessment—so you can answer questions and offer additional information. The entire appraisal report is often prepared within a week.

Pro tip: Be sure to declutter the inside, make any necessary home repairs and enhance your curb appeal before the appraiser arrives. If you’re really looking to boost value, consider home renovations that have a high cost-to-value ratio (a master suite addition and major kitchen remodel typically enhance resale value the most).

Understanding the appraisal path to success

It’s important to note that in order for your loan to be approved, your home needs to appraise at or above the amount you want. In other words, a low appraisal could prevent you from obtaining your funds. Despite it being up to your lender to choose the appraisal method that suits their needs, understanding those choices and knowing how the appraisal process works can be important to the success of your home equity loan journey.

Still, if you’re looking for a cleaner, easier loan process to reach your financial goals—be it for debt consolidation, to post tuition, or build your dream master bath—consider a lender with a real-time home valuation tool, like Discover’s Home Equity Loan AVM, for a faster path there.

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