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Defining the relationship
The appraisal’s value and the approval of the mortgage and its rate are interconnected. Here are the different scenarios:
1. Appraisal comes in higher than the sales price (price negotiated between buyer and seller) – In this case (higher loan to value ratio), the higher appraisal can positively affect the rate of interest charged for the mortgage. In other words, the interest rate could be lower than initially assumed on the pre-approval rate. For instance, if the sale price on the house is 300,000, but the appraised value is actually 350,000, then the interest rate would decrease from the initial estimation. That’s because the bank could actually benefit if the house went into foreclosure since the new sales price would be above the current mortgage amount.
2. Appraisal comes in lower than the sales price – In this scenario (lower loan to value ratio), the bank could either decide not to approve the loan or increase the interest rate. The reason is that if the buyer defaults on the loan, then the bank would be stuck with a house that’s worth less than the mortgage. Take the following example. If the sales price on a home is 200,000 but the appraised value is only 160,000, then the bank may not choose to fund the loan. That’s because the buyer would take out a mortgage of 160,000 (80 of 200,000), which would be about the same amount as the appraised value. The bank, therefore, would break-even at best, but probably come out behind once a new sales price has been negotiated.
Final tip
Just remember that appraisal values (i.e. current market prices) can fluctuate even within a few months time, which can negatively or positively affect your final interest rate. Your real estate agent should be able to inform you of the latest housing price trends.
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