You may not realize how much power interest rates hold over capital flow transactions, supply-and-demand, and homebuying. But does it ever! Which is why you should always have an appraisal to ensure your collateral purchase was correctly valued.
When interest rates fluctuate, how does this trend affect the appraisal industry?
For homebuyers, the power actually shifts to them when interest rates are lower. Loan borrowers can save money, which encourages spending on big purchases, like homes. It also expands the economy overall. The number of home appraisals will then also increase in the industry for those looking to buy or refinance because of the bigger spending in real estate.
The correlation between the value of appraisals and rising or falling interest rates is based on the loan-to-value (LTV) ratio that appraisals determine. A lower LTV ratio helps the borrower lock in a lower interest rate for a home because the lender considers the loan as less of a risk, as opposed to a ratio above 75 percent.
This is why it’s important for your appraisal valuation to be done well and with precision. If it is, home borrowers can secure a lower interest rate for the property – and even lower if the appraisal finds that the home has a higher value than what the bank says it was worth. When borrowers are able to get a low interest rate for their mortgage, appraisals increase in value because the borrower has higher purchasing power and is able to use more of their budget to pay off the loan amount.
Filling in the Appraisal Gap
The difference between the fair market value established by an appraiser and the amount you agreed to pay for the home is called an appraisal gap. This isn’t a gap you want.
A home appraisal (an evaluation and report performed by a licensed appraiser) determines a home’s fair market value. It’s a vital step for the homebuyer and the lender before a closing. The buyer doesn’t want to invest more in a home than it’s worth, and lenders use appraisals to confirm that the home (collateral) is worth enough in case the borrower defaults on the loan.
The gap closes in when the appraiser executes his evaluation services to perfection, decreasing the difference between your home’s appraisal and the loan amount, which will ultimately determine how much money you can borrow from your lender.
If you are in need of professional appraisal services that will help in your homebuying power, contact us at For What It’s Worth Appraisals.