No-Appraisal Refinancing

No-appraisal refinancing refers to a type of mortgage that is replacing an existing loan on a residence. “No-appraisal” means that the lender does not require an independent, professional assessment of a home’s value as a condition of extending a new mortgage on it; usually this new mortgage offers more favorable terms than the mortgage it is replacing.

No-appraisal refinancing is available from several federal sources. Most private lenders, like banks and mortgage companies, require appraisals when it comes to refinancing. Federal sources offer no-appraisal refinancing as a way to stabilize communities and demographic groups that otherwise might lose their houses in an economic downturn.

No-appraisal refinancing is good for homeowners but risky for lenders. Homeowners typically choose no-appraisal refinancing when they would not qualify for a new loan if the lender did perform an appraisal. Homeowners could find themselves in this situation if their home’s value has declined since they purchased it and their home is now underwater: that is, they owe more on their mortgage than the property is worth. This means that if the homeowner defaults on the mortgage, the lender will not be able to sell the property for the balance of the outstanding mortgage, so they will take a loss.

Because no-appraisal refinancing is risky for lenders, it is unlikely to be offered by private banks or other mortgage lenders. Public agencies offer no-appraisal refinancing as a public service to keep homeowners in their homes who otherwise might struggle to pay their mortgages or might be forced to default under declining economic conditions.  No-appraisal refinancing is available from several government sources: Federal Housing Administration streamline refinances, Veterans Administration streamline refinances (also called Interest Rate Reduction Refinance Loans), U.S. Department of Agriculture streamline refinancing and Home Affordable Refinance Program loans. All of these programs target at-risk homeowners.

Many homeowners are not eligible for one of the four no-appraisal refinance programs; taking a chance on an appraisal may be their only shot at refinancing. But even if they do qualify, there are several reasons why a homeowner would likely be better off refinancing with a loan that does require an appraisal. If they are currently paying private mortgage insurance (PMI) – because they bought the house with a down payment of less than 20% of the purchase price –  an appraisal that shows the home’s value has increased since then could allow the homeowner to avoid PMI on the new loan. The increase in market value, plus the amount of principal they have accrued via their old mortgage payments, must increase their equity in the home to 20% or more.

The equity increase can also win borrowers a lower interest rate on the refinanced mortgage than they could get with a federal no-appraisal loan, since a lender will consider them lower risk; borrowers with more equity are less likely to walk away from their homes.

Of course, there is no guarantee that the appraiser’s opinion of the home’s value will be high enough to allow the borrower to refinance or to eliminate PMI. Borrowers who seek refinancing that requires an appraisal must be willing to take the risk of paying a several-hundred-dollar fee with no guarantee of achieving their goal of better loan terms.