What Is No-Appraisal Refinancing?
No-appraisal refinancing refers to a type of mortgage that replaces 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 replaces.
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 might otherwise lose their homes in an economic downturn.
Understanding No-Appraisal Refinancing
No-appraisal refinancing is good for homeowners but risky for lenders. Homeowners typically choose no-appraisal refinancing when they are unlikely to qualify for a new loan if the lender did perform an appraisal.
- No-appraisal refinancing replaces an existing mortgage on a residence and does not require a home value assessment.
- Homeowners typically choose no-appraisal refinancing when they are unlikely to qualify for a new standard loan.
- No-appraisal refinancing is available from several government agencies, including the Federal Housing Administration, Veterans Administration, and U.S. Department of Agriculture.
Homeowners could find themselves in this situation if their home’s value has declined since they purchased it and their mortgage 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.
Disadvantages of No-Appraisal Refinancing
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 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 fee of several hundred dollars with no guarantee of achieving better loan terms.