Does a home equity loan require an appraisal?

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 mortgage holder has $185,000 in available home equity, 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 can borrow up to 90%.

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 you need an appraisal for a home equity loan? And, maybe more importantly, are all home appraisals the same?

Do all home equity loans require an appraisal?

Yes. Lenders require an appraisal for home equity loans—no matter the type—to protect themselves from the risk of default. If a borrower can’t make  monthly payments over the long-term, the lender wants to know it can recoup the cost of the loan.

An accurate appraisal protects borrowers too. An inflated appraisal value can leave you owing more than a home is worth, which can cause a you to go underwater financially when it comes time to sell or renovate.

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.

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

Automated valuation model—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 uses an AVM when calculating 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 information 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 available online. This means data aggregators and artificial intelligence algorithms have access to home-valuing information in real time and can 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 that can add time and costs to the process.

The AVM is a fast and easy way to value a home.  This makes it possible for a homeowner to find out how much can be borrowed, sometimes in just a few seconds.

Despite its more advanced technology, AVM can’t drive by to view the state of your home’s exterior or view inside and assess the value of your kitchen upgrade (yet!). 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.

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. Examine properties comparable to your and prepare to discuss undocumented trends that you notice 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 broker’s price opinion or BPO. It uses a combination of both valuation types. With a BPO, 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 since 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 an interior appraisal of a home, as it’s generally based on the view from the street.

If you’re expecting a drive-by appraisal, consider boosting your home’s curb appeal by trimming hedges, planting flowers, and even re-painting or replacing a front door before the 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 time-consuming process. Just like when you first purchased your home, this method requires you to pay for an appraiser approved by your mortgage lender., This professional will identify your home’s specific upgrades, deficiencies and condition compared to neighboring homes.

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.

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—master suite additions and major kitchen remodels typically enhance resale value the most.

Understanding the home equity loan appraisal path to success