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Home equity loans have the potential to do a lot for you. They can help you start that kitchen remodel you’ve been thinking about since you moved in, act as a starting point for that small business endeavor you’ve had in the back of your mind for years and even help you or a loved one get through college for a career you’ve always dreamed of.

But before you start the home equity loan process, it’s imperative to understand the steps involved. One of which includes a home appraisal. 

Learn how an appraisal for a home equity loan works, including the different types and the ways in which one can influence your loan below.

  

What is a Home Equity Loan?

Many homeowners opt for a home equity loan when they want to tap into the equity they’ve built up making mortgage payments. A home equity loan helps you do just that.  

This type of loan helps you borrow against the equity in your home, and you would receive the funds in one lump sum at closing. The amount you’re allowed to borrow depends on how much equity you have in your home and how much your home is worth, among other requirements that you should clarify with your lender. 

One important factor to note is that your home acts as collateral for your lender. If you’re unable to pay back your loan, you may be putting your property at risk for foreclosure.

 

What is a Home Appraisal?

If you’ve been through the homebuying process already, you may already have an idea of what a home appraisal entails. This process includes a professional determining the value of your property by looking at factors including an in-person inspection of the interior and exterior of the home, neighborhood characteristics, market conditions, a comparison of other similar properties and more.

They would then analyze these findings to come to an estimate of your property’s fair market value.

 

Types of Home Appraisals

There are a couple of different types of home appraisals that your lender can use when evaluating your home value.

Full Appraisal

A full appraisal is what you would typically think of when you get a home appraisal. In this type, a professional appraiser will go through the property in person to examine the inside, outside and systems of your home in addition to comparing the property with other similar properties that have been sold recently. 

Automated Valuation Model (AVM)

An AVM removes the need for an appraiser to physically visit your property. This type of appraisal involves statistical modeling and systems to look at the data that already exists about your home and other properties in the area to determine its value. While generally fast and easy, this type of appraisal is only as good as the data it examines and may not consider all the nuances of your home, including any recent upgrades. 

Drive-By Appraisal or Exterior Only Appraisal

As the name suggests, a drive-by or exterior only appraisal involves a professional only inspecting the outside of your property. They would then use public records to fill in the blanks. This type of appraisal is typically easier and more convenient than other types, but the appraiser may overlook any interior remodeling or renovations that may increase the value of your home. 

Desktop Appraisal

Similar to an AVM, a desktop appraisal looks at records that already exist about your home to determine the value, including public and private information and photos. An appraiser would usually not have to physically go to your home, but they also wouldn’t be able to take into consideration any recent changes.

Hybrid Appraisal

This type of appraisal involves a third party coming to your home to collect data about its condition. They would then give this information to an appraiser who would then determine the property’s market value. You may need to take this type of approach if you’re in an area with a shortage of appraisers.

 

How Does an Appraisal Impact Your Home Equity Loan?

The results of a home appraisal may directly influence how much you’re able to borrow against your home equity. If the value of your property is high and your mortgage balance is low, you may be qualified for a larger amount than if your home value was lower than expected.  

Lenders may also look at your loan-to-value (LTV) ratio, which compares your mortgage balance with the value of your property to determine the loan amount you may qualify for.

  

How to Prepare for a Home Appraisal 

Fix Anything You Can

If anything in your home needs repairs, try to fix it yourself or get someone to fix it. If there’s any significant damage to your home, it can impact your home appraisal and, as a result, your home equity loan.  

Research Other Similar Homes

Set realistic expectations for yourself by researching properties similar to your own in your neighborhood and properties that have recently been sold. This will help you get an idea of how much your home may be worth. 

Clean the Interior and Exterior

While cleanliness isn’t necessarily a factor that an appraiser will take into consideration when determining your home’s value, you do want to put your best foot forward. This includes giving a good first impression and ensuring the appraiser can get through your home easily. 

Note Your Upgrades

Point out any recent home improvements or upgrades to the appraiser. This could help add value to your home and help the appraiser see its real potential. You may even want to consider making a list for both you and the appraiser to ensure you don’t forget anything.

 

Be Proactive and Do Your Research

If you believe a home equity loan can help with your goals, you may want to consider being proactive and take the time to understand the appraisal process. This can help you know what to expect and help the appraiser see your home’s potential. Ultimately, it can help you better prepare for a home equity loan.

This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.