Purchasing a home is a big financial decision, based not only on location and price, but the potential for its value to increase over time. As a property appreciates in value, homeowners have several options for accessing equity – the difference between the mortgage balance and the sell price.
Home equity loans or lines of credit can be beneficial in taking care of large purchases or debt consolidation while maintaining ownership of the home; on the other hand, selling the property and using the equity to purchase a new home or cover another financial need is common. In either case, the home’s value is important to understand.
Ask a homeowner what he or she thinks the value of their home is and they will likely provide some figure. However, where that number came from varies greatly from one person to the next. That’s because there are many ways to view the value of a home, including a professional appraisal, a tax assessment and the home’s actual market value. If you’re thinking about borrowing from your home’s equity, or you plan to see in the future, here’s what you need to know about the differences between each figure.
The All-Important Appraisal
Getting an accurate appraisal for your home is required for several aspects of homeownership, such as taking out a new home equity loan or line of credit, or gearing up to sell your property. In either case, the process is completed by a licensed professional, trained and educated in how to provide a true value of the home. The purpose of an appraisal is to ensure a lender that your home is worth what you say, based on the condition, age, and features of the property.
For homeowners who are getting ready to list their property for sale, or those who already have an offer on the table, the appraisal is one of the most critical pieces of the puzzle. When an appraisal matches the sell price, buyers are more inclined to secure a mortgage loan for that price. If an appraisal comes in lower than anticipated, for whatever reason, sellers may have to concede to a lower sale price because lenders won’t lend money for more than the home is worth. Similarly, an appraisal used for a new home equity loan application can make or break the lender’s willingness to approve it. A low appraisal may mean you don’t qualify for as much of a loan or line of credit, while a higher appraisal works in your favor.
How Tax Assessments Stack Up
Some homeowners base their home value answer on the annual tax assessment provided by the city or county in which they live. An assessment differs greatly from a professional appraisal. The municipality determines the assessed value of a home for tax purposes, not necessarily resale value. Based on this number, property taxes are billed to the homeowner. While there are some rare cases where the assessed value and the appraised value are the same, tax assessments are often very different figures than an appraised number.
Lower tax assessments are good for homeowners who are concerned about their property tax bill. However, they can be frustrating when the assessed value is considered as part of the appraisal process. Another difference is that homeowners do not pay for tax assessments as they do for home appraisals, the latter which runs somewhere between $250 and $500.
Market Value Nuances
Finally, the market value of a home is most closely related to the appraised value, not the tax assessment, but there can still be differences in the bottom line number. Market value can be provided through online tools, a realtor, or another professional, whereas an appraisal must be completed by a licensed appraiser. In some cases, real estate professionals offering market value estimates may increase or decrease the value, based on their motivations. This does not always work to the benefit of you as the homeowner, but it can be a good place to start before a formal appraisal is done.
