Appraised Value is a measure of a property’s worth at a specific point in time. This appraisal is performed by professional appraisers, usually selected by lenders during the mortgage origination process. Borrowers are responsible for paying for this appraisal. The appraised value plays a crucial role in loan underwriting, influencing the amount of money buyers can borrow and the terms of the loan.
For instance, the Loan to Value (LTV) ratio is determined using the appraised value. If the LTV exceeds 80%, lenders require borrowers to purchase Private Mortgage Insurance (PMI). When the LTV drops to 78% or lower, PMI payments may be waived.
It is important not to confuse appraised value with market value, although both are significant in real estate transactions, including residential homes, retail buildings, commercial properties, land, and farms, there are distinct differences between the two. Market value is driven by consumer demand and the supply of homes, while appraised value is a professional assessment based on the appraiser’s opinion and data from recent sales of similar properties in the area. Appraised value provides a precise figure for a property’s worth. On the other hand, market value can fluctuate more significantly, influenced by what buyers are willing to pay.
Another concept that is sometimes confused with appraised value is assessed value, which are determined by the city assessor’s office for the purpose of calculating property taxes. Entire town and city is assessed over a specific period, typically ranging from four to twelve months and these assessments, combined with the assessed values of all properties, help determine the annual property tax rate. Although tax rates may change annually, assessments usually do not, unless significant disparities arise between properties.
Some states mandate reassessment of homes upon sale or transfer. Typically, assessed values and appraised values for a property do not match exactly, as assessed values are not affected by short-term market activity, while appraised values reflect recent market conditions.
In summary, appraised value is a critical component in real estate transactions and mortgage lending, providing a professional estimate of a property’s worth at a specific time. While it shares some similarities with market value and assessed value, it is a distinct concept with its own unique characteristics and applications in the real estate industry.
