Difference between refinance and purchase appraisal

A purchase appraisal evaluates a home’s value to protect the home buyer from overpaying and the lender from lending more than the home is worth. A refinance appraisal assesses current market value to establish how much home equity you hold so you can adjust your interest rate, change your loan term, or withdraw cash.

Key takeaways:

• Lenders typically require an appraisal when you buy a home or refinance your mortgage to verify the fair market value of your home.
• A purchase appraisal ensures the loan amount doesn’t exceed the value of the home, while a refinance appraisal determines how much equity you have.
• Some government-backed loan programs offer streamlined refinances that allow borrowers to skip the appraisal if they're not borrowing any equity.

Refinance appraisal vs. purchase appraisal

Here’s a side-by-side comparison of the key differences between an appraisal for a home purchase and an appraisal for a refinance.¹

What is a home appraisal?

A home appraisal is an unbiased, professional opinion of a property’s fair market value conducted by a licensed third-party appraiser.

An appraisal is an important part of the home buying process because it protects the buyer from overpaying for a new house. Purchase appraisals also protect lenders from lending home buyers more money than a property is worth.

Appraisals are also important when you’re refinancing your mortgage because they establish how much home equity you have.

Appraisers establish an appraised value by analyzing several key elements:

• Property size and structure: Total square footage, lot size, architectural style, and room counts.
• Interior and exterior condition: Structural integrity, safety hazards, roof health, and deferred maintenance issues.
• Upgrades and improvements: Major modernizations like kitchen remodels, updated electrical systems, or new roofing.
• Real estate comps: Recent sales data from similar nearby homes – known as comparables" - that have sold within the last 90 to 120 days.

It’s easy to confuse an appraisal and an inspection. An appraisal is concerned primarily with the value of the home, while a home inspection is concerned with its physical condition.

Appraisal for a home purchase

If you’re using a mortgage to finance your home purchase, your lender will require an appraisal before you can close on the mortgage and purchase the house.

Let’s look at some of the specifics of the appraisal process for a home purchase.

When do you need a purchase appraisal?

You'll usually need an appraisal when you buy a house with a mortgage, though some loans may allow an appraisal waiver or alternative valuation methods.

If you're paying cash, an appraisal is optional.

What if your purchase appraisal is higher or lower than you expected?

If the home appraisal comes back higher than you expected, you can proceed to closing with that much more equity.

If the appraisal comes in lower than you expected, there are a few ways this could go:

• Make up the difference in cash. A low appraisal will affect how much you can borrow. Your lender won’t let you borrow more than the property is worth, so you’d need a larger down payment to cover the gap between the appraised value and the sale price.
• Request a new home appraisal. Review the appraisal report and look for errors that could justify an appeal. Failing to notice upgrades and comparing the property to properties very far away from the home are a couple of reasons for appraisal appeals.
• Renegotiate the purchase price. Most offer letters include an appraisal contingency, which allows you to back out of the sale if the appraisal comes in below your offer. This can give you leverage to negotiate a lower price with the seller.
• Cancel the real estate transaction. If you have an appraisal contingency and the buyer refuses to reduce the price, you can cancel the sale without penalty.

Appraisal for a mortgage refinance

A refinance appraisal looks at the property to determine its fair market value.

This helps the lender determine the terms for your new mortgage, which may include a lower interest rate, shorter or longer loan term, canceling private mortgage insurance (PMI), or borrowing your equity with a cash-out refinance.

What to expect with a refinance appraisal?

Because you occupy or own the property, you can attend a refinance appraisal inspection. Homeowners can point out recent capital improvements and provide a list of upgrades along with receipts. Presenting documented improvements can directly influence the appraiser's final report, lead to a higher home valuation, and maximize your home equity.

You can estimate your equity with the home equity calculator from Rocket Mortgage.

When isn’t a refinance appraisal required?

Most refinances require a home appraisal, particularly cash-out refinances. However, there are a few refinancing programs that don’t require an appraisal:

• FHA Streamline refinance. FHA Streamline refinances can allow you to refinance without an appraisal in most cases if you initially bought your house with an FHA loan.² FHA Streamlines often require less paperwork and have more lenient credit standards than typical FHA refinance options.
• VA Streamline refinance: A VA Streamline refinance allows you to change your term or interest rate without an appraisal.^{3, 4} Eligible military personnel and veterans with an existing VA loan can use a Streamline refinance to reduce their interest rate or change terms without a home appraisal or full underwriting.
• USDA Streamlined refinance: A USDA Streamlined refinance is a simplified type of refinancing option for homeowners who have a USDA loan. You can skip the appraisal when you refinance with a USDA Streamlined. Rocket Mortgage doesn’t currently offer USDA loans.

Each of these refinance options has a specific set of criteria you must meet before you qualify.

If you’re thinking about refinancing, you can use the Rocket Mortgage refinance calculator to estimate your payment and costs.

What a low appraisal means for your loan

When a refinance appraisal comes in lower than expected, it affects your borrowing strategy:

• Reduced cash-out limits. If you are pursuing a cash-out refinance, a lower property valuation shrinks your available home equity, reducing the amount you can borrow.
• PMI requirements. If your new loan balance exceeds 80% of the updated appraised value on a conventional loan, you may be required to pay for PMI.
• Loan denial. If the home value drops significantly, your LTV may exceed lender limits, preventing the refinance from closing unless you bring extra cash to the table to pay down the balance.

How much does a refinance appraisal cost?

Standard single-family residential refinance appraisals generally cost $300 – $500. This is comparable to the cost of a purchase appraisal. Costs can be higher for complex, custom, or multifamily properties.

Appraisal fees are part of your closing costs, which typically total 3% – 6% of your loan amount.

How appraisers decide value

When an appraiser evaluates your home, they typically look at three major categories to settle on a final dollar amount:

• An evaluation of the physical property. Appraisers inspect both the interior and exterior of your home. They measure total square footage, count bedrooms and bathrooms, and assess the overall structural health of the building. They take careful note of the home's general condition, keeping an eye out for deferred maintenance, safety hazards, or needed repairs.
• Home upgrades and improvements. If you’ve put time and money into upgrading your home, the appraiser will take that into account. Major improvements like a remodeled kitchen, modern bathroom fixtures, a new roof, or upgraded electrical systems can boost your valuation. On a refinance appraisal, you can walk through the property with the appraiser to highlight these projects directly.
• Real estate comps. The appraiser looks at recent sales data from nearby comparable homes – referred to as comps. They look at properties that are similar in size, age, and condition that have closed within the past 90 to 120 days to see what real-world buyers are actively paying.

FAQ

Let’s look at some frequently asked questions about refinance and purchase appraisals.

How do purchase and refinance appraisals differ?

With a purchase appraisal, you normally don’t attend the appraisal since you haven’t purchased the home yet. When a refinance appraisal is conducted, you’re able to be in attendance because you own the home that’s being appraised.

Is an appraisal always required for a refinance?

Home appraisals are often required for a refinance, but not always. If you’re only changing your loan’s term, interest rate, monthly payment amount, or payment structure, you can often do so without getting a new appraisal. Some refinance loans may qualify for an appraisal waiver based on lender and investor guidelines, while certain government-backed streamline refinance programs, such as FHA Streamline and VA Streamline loans, generally do not require an appraisal. Your lender can let you know whether your refinance qualifies.

Do appraisers always come inside for a refinance appraisal?

Not always. While standard rate-and-term or cash-out refinances often require full interior and exterior inspections, lenders may permit alternative valuations – such as an exterior-only drive-by appraisal or a desktop valuation – depending on your LTV and loan program.

What is the 2% rule for refinancing?

The 2% rule is a rule of thumb suggesting that refinancing is only worthwhile if you can reduce your mortgage interest rate by at least 2 points.

Can you use a purchase appraisal for a refinance?

Generally, no. Appraisals have a limited validity window – typically 90 to 120 days – and are tied to specific transaction types and lenders. If you bought your home recently, your lender usually requires a new valuation or an updated automated property check to process a refinance.

What will fail a refinance appraisal?

While you technically don’t pass or fail an appraisal, severe safety hazards, health violations, or structural defects can stall a refinance appraisal. Common issues include crumbling foundations, active roof leaks, exposed electrical wiring, peeling lead-based paint, broken heating systems, or severe water damage.

The bottom line on purchase vs. refinance appraisals

An appraisal is a professional estimate of how much a home is worth. Borrowers usually need to get an appraisal when they refinance, and they’ll always need one before they buy a home when using a lender. While purchase and refinance appraisals share the goal of establishing a property's fair market value, they serve different purposes.

Purchase appraisals focus on protecting buyers and lenders during a sales transaction, whereas refinance appraisals measure accumulated home equity to unlock better rates, shorter loan terms, or cash flow.

Are you looking to purchase a home or refinance your mortgage? Start the process today with Rocket Mortgage.

¹ Refinancing may increase finance charges over the life of the loan.

² The FHA Streamline program may have stricter requirements in some states. In order to qualify for the FHA Streamline program, an immediate .5% minimum reduction in interest and mortgage insurance premium is required. Some states may require an appraisal.

³ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

⁴ The VA Streamline program may have stricter requirements in some states. In order to qualify for the VA Streamline program, you must have a VA loan. The VA Streamline is only available on primary residences. Cash-out transactions are not allowed. In order to qualify for a VA Streamline, a 0.5% minimum reduction in interest rate on the previous fixed-rate loan must occur if the new loan will be a fixed rate or a 2% minimum reduction in interest rate on previous adjustable rate mortgage loan must occur; a minimum of 6 months of consecutive mortgage payments must be paid on the current loan at the time of application. Some states may require an appraisal. Additional restrictions/conditions may apply.