Home improvement, equity, refinancing??

We are first time homeowners. We'd really like to redo our yard but it's a big project that will cost a lot of money, and I want to make sure it will translate well to equity. I'm a little confused on exactly how an appraisal is actually tied to equity — it's kind of only imaginary/hypothetical unless we refinance, right?

We are hoping to refinance and drop our PMI soon, and we're wondering if investing in this project will help give a final push to that 80% LTV mark.

 

Original loan amount: $322,050.00
Current principal balance: 305,018.42
Our interest rate is 4.25%

We live in a healthy housing market and the Zillow Z-estimate is $390,765.00. (*I realize this may not be reliable.)


In addition to this, we have made a few significant improvements:

-Replaced master bedroom carpet with hickory hardwood.
-Replaced unsafe/old balcony with a beautiful balcony that meets code.
-Painted entire house exterior.

Using our sale price of $344,000, our LTV is 88.67%. Using the Z-estimate it is 78.21% (and that's without our improvements factored in).

Is it worth getting an appraisal now, hoping we can drop PMI, or should we wait until we can do our yard project? (Or should we actually refinance to a lower interest rate instead of just dropping PMI?) How much can we expect a $15,000 yard project to boost our equity? 

THANK YOU for reading this far and for any advice you may have.

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  • I've never had a a house appraise anywhere close to a Zillow estimate, and the appraisal is all that will matter. Housing appraisals are based on comparison of recent sales of similar properties, so it's unlikely any of the improvements you did would any value to the house for purposes of appraisal.

    Still might be worth it to refinance into a lower rate though.

     

    To answer your question, the purpose of an appraisal is for a bank to determine their risk of recouping the amount of money lent in the case of foreclosure. Based on that risk they will make an appropriate loan offer.

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    • nolesrule Helpful information — thank you.

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  • I agree with nole rules. I'd also add not all home sales around you count in the appraisal. It's some crazy rules based on the type of sale. I've not unlocked the secret to sell a house. I've owned two and I'm on the third, but selling is always tough. If I replace carpet with hardwood, I like it more and it's more expensive, but if my potential buyer wanted carpet, the hardwood becomes a negative. Another example, the house we're in had 13 flower beds. If you're retired, great, but way to many for us. I've been giving away plants and returning the areas to lawn, also gives faster mowing time. Now, if you have a failing retaining wall or other problems, then fix it, but don't expect the value to go up.

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    • Khaki Storm Thankfully we're not looking to sell at this point — that would be a whole 'nother level of stress. In our specific case, we replaced 30-year-old purple carpet with hickory, so I hope it was an improvement. 😆

      The landscaping is.... a huge, huge mess. The yard is large (1/4 acre lot) and was landscaped in 1980 and has hardly been touched. We removed two huge juniper bushes last summer and are stuck because we discovered a layer of rock under a few inches of dirt, plus shallow cottonwood roots running under them. We can't mow the weeds down because of the rocks, but removing them manually would be crazy. There's also another rock bed area that is entirely rock overgrown with weeds, interspersed with yucca that wants to stab you if you get near it. The $15k yard estimate is not for fancy upgrades at all.  It would just cover needed scraping, fixing vulnerable grading, adding in new dirt, sod, and rock areas, and installing sprinklers. Sprinklers are obviously not necessary, but while we have it all ripped up anyway we thought it might be a good idea both for weed control and eventual resale. 

      Basically, this house is a fixer upper that would have been worth half the amount in another part of the country. 

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      • Superbone
      • YNAB convert since 2008
      • Superbone
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      Beige Pilot (a01f1337c3b8) I understand the strong urge to improve the yard but I would concentrate on getting in a better financial position first and then move onto the landscaping.  Getting rid of PMI and lowering your monthly payment via a refinance will free up income and savings to make the landscaping much easier to accomplish as well as all other financial goals.

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      • Khaki Storm
      • YNAB book topics online: https://support.youneedabudget.com/r/q5w48j
      • Khaki_Storm.1
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      Beige Pilot (a01f1337c3b8) Sounds like a plan. When we moved into our house with overgrown beds, I did a trick for 'new' bushes. I forget the term for it, but I basically cut them back to just a stump. That looked awful, however, the following year the stumps grew a few leaves, and the year after that looked like proper little bushes. Out of 6 or so, I believe I only lost one that didn't come back. It was a good plan, but then my water problems called for digging all of them up, which was sad. I relocated some, but others didn't make it. I've also purchased saplings trees from my county soil conversation office. They are doing well. Again, it takes time. But, they were only like $7 for 3 saplings three years ago. To buy a 3yr old tree or flowing bush of the same type now would be like $30 a plant, at least. Not all survived, but most did.

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  • I would take home improvements out of the equation. Save that cash in case you need it to get under the 80% LTV ratio in a refinance which I definitely would explore as rates are at all-time lows. I refinanced recently to under 3% for a 30 year fixed and now I’m seeing advertisements for even lower rates.

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  • So, full disclosure - my husband is an appraiser and so I have learned a ton about the appraisal world in the 15+ years we have been together. While an appraisal is fairly straightforward, there are nuances to it and professional judgement. We are in Canada so my husband does have a designation. But overall, the principles are the same around the world. 

    For a home, they usually are determining the market value of what the home would sell for on the open market in an arms length transaction. Meaning, what would a reasonable stranger pay for this home. They may do an inspection and they are looking to confirm that the home is in accordance with the land title  and the general overall condition. Is it well maintained, no illegal suites or additions, conforms to local bylaws etc. So, whether you have carpet or hardwood is less relevant than the age and condition of the floor covering. Then, they will find comparable sales within the immediate area. Looking at the comparables, they will make adjustments to the value of the home being appraised. All of the other comparables are smaller? Your home will get an increase (unless it is McMansion that does not fit the neighbourhood, but that is a whole other element). Are all the other homes remodeled and your home is not? Slight adjustment down because the purchaser will more than likely need to remodel the home. That will give a range for the value and then professional judgement on final value.

    Those adjustments are based on what would a reasonable purchaser think about this home in comparison to others.  That is why it comes back more to the age and condition than the specific type of improvement. Because the appraiser can't account for people who prefer hardwood or carpet but people will generally pay more for a home that is well maintained and has new stuff. When it is not well maintained and has old stuff, the purchaser thinks of all of the things that have to be done that will cost $ and that will generally drive the price down. That is what an appraiser in general is trying to capture.

    As nolesrule stated, the bank then uses the appraisal to determine if your requested mortgage is substantiated by the appraisal. So, if the appraisal is $300K and your purchase price is $350K, you will get turned down because if you default, the bank will not get their dollars back from selling it themselves. You want to see an appraisal at or above your purchase price. But please don't tell that to the appraiser or say "the appraisal must be $X". Real annoying and some will definitely stay within their professional judgement but at the low end if they can justify. 

    If you get an appraisal for different reasons (rental - cash flow OR insurance - replacement value), you may get a different number because they are using a different set of assumptions to appraise the home.

    Apologies for the long post but thought I would share my learnings on this relatively niche occupation.

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    • Navy Blue Pegasus Very much appreciated, thanks!

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  • Before you even think of getting an appraisal, have the real estate agent who helped you buy the house do a comparative analysis to get a better estimate of the value than Zillow.  My old real estate agent has done that for me for free in the past.

    I'm not sure how improvements and additions would help your value, but that's another question to ask your real estate agent.  Or, if you have the contact info on the appraiser from the purchase, you could also ask him/her.  Your local appraiser or real estate agent who knows your local real estate market well is probably going to give you a better estimate than your YNAB friends, as cool as we all are :D

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      • nolesrule
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      • nolesrule
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      PhysicsGal One does not get their own appraisal for the purpose of a refinance.  The lender hires their own appraiser and owns the results. They are not portable in the case you decide to switch to a different lender in the middle of a refinance process.

      This is just one part of what's broken with this system.

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    • PhysicsGal You can definitely get the real estate to give you an estimate of what they would list it for and subsequently what it would sell at. However, they are normally qualified to provide that opinion to a bank. It is definitely a better idea of value than the online estimators which are likely using mass online appraisal methodology which is different than appraising an individual home. Mass appraisals most common usage is in determining your value for municipal tax purposes (at least in Canada where it is done anywhere from annually to every other year to five years)

      nolesrule  yes, unfortunately the bank does own the appraisal because they are the client. Also the appraisal has a limited duration due to changing market conditions. An appraisal 6 months ago in the current pandemic may be useless depending on the local impact on real estate. 

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      • nolesrule
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      • nolesrule
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      Navy Blue Pegasus Yes, of course it would have a limited duration. I would not expect otherwise.  It's just unfortunate that the lender owns the appraisal rather than the buyer/refinancer because it creates friction in the process of shopping for a lender. It's essentially a commitment fee as it is not an insignificant cost.

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    • nolesrule Fair enough. But even if you got the appraisal on your own, it doesn't mean that you could share with the bank for their use. It is client and purpose restricted. You would have to make you and the bank the client.

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      • nolesrule
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      • nolesrule
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      Navy Blue Pegasus No, you'd change the basic structure of how the appraisal process actually works with regards to restrictions. The current restrictions are put in place precisely for the reasons I mentioned, and that is what needs to be changed.

      The  buyer/refinancer would hire the appraiser and then own the report for stated purpose of acquiring a mortgage and be able to use it as evidence of Fair Market Value to any lenders up until such time as the appraisal has expired. There is no need for the lender to be part of this, only that lending regulations would have to require that the lender accept the appraisal provided it is from a currently licensed appraiser.

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    • nolesrule I like the idea. Definitely would require quite a few changes.

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  • I emailed our mortage advisor and asked him to run some numbers to see if it would be worth it to consider a refi at this point.  We'll start there. Thanks for the advice!

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  • If anyone's still hanging around here...

    Our lender and realtor came back with Comparative Market Analyses placing our home at $407k and $410k. Way above the z-estimate even. Is there something weird going on where it's to their advantage to overestimate our home value? If it gets us a refinanced loan (possibly even without an appraisal, they said) at a better interest rate and without PMI, does it really matter?

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      • Superbone
      • YNAB convert since 2008
      • Superbone
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      Beige Pilot (a01f1337c3b8) Not as long as you’re not paying too much for the refinance. I was lucky enough not to have to get an appraisal when I recently refinanced. Make sure you understand all your costs.

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    • Beige Pilot (a01f1337c3b8) Your bank is likely doing what is called a "desktop appraisal". They have a database with the relevant information that will give them a ball park figure of the appraised value. To confirm, they would get an appraisal if something is out of whack. Say they notice property improvements or it has been a super long time, local economic factors.

      The realtor is doing an analysis of what they think they could sell it for. There is no "science" or methodology required in the realtor profession to come up with the number. It is all based on the personal experience, background and length in industry. It is a good sign that they are aligned.

      Z-estimate is probably using their own proprietary methodology or information. It could be the "random teenager in the basement" pulling random information from random sites. Unless they put their methodology and sources on the site, it is extremely suspect.

      If the lender has given you that value, I would be fairly comfortable with it. No need for an additional appraisal. But that is just my opinion!

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