If you’re wondering whether you should get your home appraised for the purpose of a refinance appraisal—we’ll deliver that answer, plus much more. 

Here’s the recent news from the Bank of Canada to combat rising inflation: 

“Canada’s central bank said Wednesday it is raising its target interest rate by a full percentage point in an effort to fight inflation — and warned more rate hikes are likely to follow. The Bank of Canada raised the overnight rate to 2.5% in the biggest increase since 1998 and the highest level since 2008.”— CNBC, July 13th, 2022

Now, you may be wondering how this rate increase significantly impacts your monthly mortgage payments. 

And if your mortgage term is coming up for renewal—yes, it can actually make a big difference to your bank account. 

Considering the simple fact that your first year of monthly payments for a 30 year term equates to a whopping 70% in interest—it can feel like you’re going nowhere. And only after year 23 does this lopsided ratio of interest to principal begin to switch in your favor. 

If this feels overwhelming, relax and rest assured, we’re going to clear away all the smoke and mirrors for you, and make it very clear. 

You’ll soon know exactly what lenders want and how to leverage that information to your advantage before, during, and after your appraisal refinancing. 

Today, you’re going to quickly learn how to prepare for the coming rate hikes, while steering clear of potential headaches, worrying, and restless nights.

The Cost of Rising Interest Rates on Your Mortgage

A rising interest rate means a higher cost of borrowing. And for a $750,000 mortgage over a 30 year amortization period, a 1.0% increase (4% to 5.0%) can cost you a whopping $160,000 more in interest payments. 

Now that’s a lot of moolah. Imagine what you could do with an extra $160,000 in cash for yourself or loved ones.

So pay close attention, and learn how to potentially save yourself THOUSANDS…. 

If you’re planning on getting an appraisal for refinancing, you likely fall into one of these common scenarios. 

You’re looking to:

• Lock in a lower interest rate before the rate hikes
• Purchase an additional property
• Access additional funds
• Leverage accrued home equity
• Consolidate debt at a lower interest rate

What is a refinance appraisal? 

In a refinance appraisal you’re essentially applying for a new loan. This may involve changing the terms, the interest rate, or trying to access cash, and more. 

And it almost always begins with a home appraisal to assess the current market-value of your home. 

In some scenarios, a ‘no appraisal refinance’ is allowed. This is usually approved on rare occasions to individuals who have an excellent credit score, low LTV (loan-to-value) ratio, or if they recently just had an appraisal done. 

If you’re looking to refinance with no appraisal, it’s advised to speak to a professional mortgage expert. 

Why Do Lenders Like Seeing a Home Appraisal for a Refinance?

Lending money to an individual is no different than lending to a corporation. They’re ultimately looking to profit from lending you money—without losing their own money.

And a home appraisal helps minimize their risk. 

That is if a borrower defaults on their mortgage payments, the lender will be able to recover their principal by selling the home though the foreclosure process. 

How Do I Prepare for a Refinance Appraisal? 

Remember this is a long-term financial planning decision, so you’ll want to ensure you’re taking on ‘good debt’ and not ‘bad debt’. 

After answering these key strategic questions, you’re going to require all the same documents you needed when you got your first mortgage. 

Here are some things a lender wants to see and what to expect: 

1. Credit Review, plus all your T4s, income sources, income-taxes, property taxes, and current liabilities. 

2. There are additional fees for the home appraisal, possible title insurance, closing costs, and application fees. 

3. For the purpose of refinancing your existing mortgage, your lender will arrange for an independent 3rd-party home appraiser to assess the current market-value of your home.

Our full detailed analysis on the home appraisal can be found—here. 

This assessment can take anywhere between 30-45 minutes. Whereas the refinance appraisal timeline can be days and up to a month and half. 

What’s the Difference Between a Refinance Appraisal and Home Inspection?

A refinance appraisal is the process of qualifying for a new loan based on updated financial data. This usually involves a home inspection to re-evaluate your liability to assets. 

And the home inspection is a vital first step to getting a successful refinance appraisal. 

To do this, your lender will reach out to an independent 3rd-party home appraiser. This trained professional will visit your home to assess its value based on several criteria (see further down below). 

How Much Does a Refinance Appraisal Cost, and Who Pays for It?

Depending on your home’s province, an appraisal can cost anywhere between $300-$600. The appraisal is arranged by the lender and paid for by you. And depending on your unique situation and which province you reside in, the entire process can include additional costs for: insurance, registration, and a real estate lawyer. 

Advantages of a Refinance Appraisal

Inside your home, you’ve made sure your lights are all working. Your HVAC is cleaned. Your heating and water work. And your home is smelling like roses. 

On the outside of your home, you’ve mowed your lawn, and strategically planted the right coloured petunias. 

Now that’s a lot of work! So you might be asking, what’s the big payoff? 

1. Avoid Private Mortgage Insurance (PMI)
If you started your mortgage with a private mortgage insurer, and your home has since increased in value causing your loan-to-value ratio to now be less than 80%, you can now thankfully ditch the PMI premiums you’ve been paying for every month.

2. Get a Lower Interest Rate
In most cases your lender will loan you an amount up to 80% of your home’s market-value. So if your home has increased in value, the LTV (loan-to-value) ratio will decrease.
This means less risk for the lender. Meaning they’ll likely give you a lower interest rate.

3. Potential for a Larger Cash-out Amount
After your home appraisal prices your home higher, you may want to cash-out $100,000 to pay for your child’s post-secondary education.

Here’s how you do it: 

Let’s say your home is currently worth $1,000,000. You initially began with an $800,000 mortgage. And after years of monthly payments, your principal balance is now $400,000. 

This means you now have $600,000 in home equity ($1,000,000 – $400,000 owing). 

Most lenders will allow you to borrow up to 80% of the the value of your home. This means you could potentially request an additional $400,000 in a refinance. 

 So to access funds for your child’s post-secondary education, you’ll request a cash-out refinancing of $500,000. 

Why $500,000? Because you’re essentially getting a new loan based on $100,000 in cash-out, plus the existing $400,000 principal owing on your home mortgage. 

Disadvantages of a Refinance Appraisal

Below are potential disadvantages depending on your unique circumstances. 

1. Cost
You can pay additional fees for your home appraisal, applications, and for a real estate lawyer. And if you’re looking to go with a different mortgage lender before the end of your term is up because they are offering a lower rate expect to incur penalty fees to break your mortgage early.
Or if you’re changing from a fixed-rate to an adjustable-rate mortgage, there may be additional penalties as well.

2. Lower Property Valuation
Now, if your home is priced lower, your loan-to-value ratio will increase. This means more risk for the lender. They may lend you less or none at all.

If your home has decreased significantly to the point where your mortgage is greater than the value of your home, you will have an ‘upside-down mortgage’. And now your mortgage is considered to be ‘underwater’.

If you find yourself in this sticky situation, I advise you speak with professional mortgage expert for additional advice.

Frequently Asked Questions (FAQ)

Final Thoughts

As you can see getting a home appraisal before refinancing can be a lot of work with many strategic considerations. 

When you understand specifically what lenders want and why, the process becomes easier to manage. 

Since every home owner’s situation and goals are different, it’s wise to speak to a non-commissioned professional mortgage expert. 

A non-commissioned broker delivers you access to the best of both worlds. They have access to all the best rates, and have zero financial conflict of interest as they’re on salary. 

They get paid the same amount regardless of the mortgage rate you qualify for. And as a result, your needs are always placed ahead of their own. 

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