The value of your home is affected by factors ranging from the amount of new construction in your local community to the state of the national economy. Lenders and property tax assessors use appraisals to determine the current value of your home. However, while both property tax and loan-related appraisals involve the same house and the same data, these two appraisal types often produce different results.
State-licensed appraisers provide home appraisals. Some local government entities employ full-time appraisers, while others hire these professionals on a contractual basis as and when they are needed. When you refinance your home, you normally pay the appraiser's fee, although your lender actually arranges the appraisal. Your property tax appraisal may be done by the same individual who does your refinance appraisal. For both types of reports, appraisers determine your home's worth by calculating the cost of replacing it or by basing its value on the sale price of recently sold homes in the area. If you own an investment home, the appraiser may take rental income into account when pricing the property.
Property tax appraisals are conducted just once per year. Your annually assessed property taxes are based on the value of your home at the time of the appraisal. You might not get your tax bill until several months after the appraisal was done; by that time, your house may have risen or fallen in value. When you refinance your home, an appraisal is ordered just a few weeks before you close on the loan. If the appraisal comes in lower than expected, the lender may pull the plug on the loan. Nevertheless, the appraised refinance value is more up to date than the property tax value.
In some states, laws exist that are designed to limit property taxes. In California, the tax-assessed value of your home can't increase by more than 2 percent per year. In Florida, annual increases in tax-assessed values are capped at 3 percent. If real estate prices in these states rise by more than 2 or 3 percent, the tax-assessed value of your home will not reflect your home's true value. No such laws exist that restrict the ability of an appraiser to price your home accurately for a refinance appraisal. However, for some types of loans, including Federal Housing Administration's Streamline loan, your lender may use the same appraisal you used for your existing loan when refinancing, rather than ordering a new appraisal. This value may bear little resemblance to your home's current value.
Lenders use a calculation called a loan-to-value ratio to restrict the size of a refinance loan. Many lenders don't allow you to refinance your home if the new loan exceeds 80 percent of your home's value. This means that low appraisals are bad news for refinance loans. In contrast, property owners often hope for low appraisals when it comes to property tax assessments. The higher your home's value, the more taxes you have to pay.