What Happens If an Appraisal Comes in High?

A home appraisal provides an objective assessment of a property’s market value. This evaluation is required for lending purposes in real estate transactions to ensure the value of the home supports the loan amount. When an appraisal indicates a value higher than the agreed-upon purchase price or a homeowner’s existing valuation, it means the property is worth more than expected.

Implications for Buyers and Homeowners

A high appraisal creates an advantageous situation for the buyer. This means the buyer gains “instant equity” upon acquisition. For example, if a home is purchased for $300,000 but appraises at $325,000, the buyer immediately possesses $25,000 in equity. This immediate equity strengthens a buyer’s financial position and provides a head start on wealth building.

For existing homeowners, a high appraisal similarly increases their home equity. Home equity is the difference between the home’s appraised value and the outstanding mortgage balance. Increased equity can be leveraged for financial strategies, such as refinancing. A higher appraised value can lead to a lower loan-to-value (LTV) ratio, potentially qualifying homeowners for more favorable loan terms and lower interest rates.

A reduced LTV ratio might also allow homeowners to eliminate private mortgage insurance (PMI) if their equity surpasses 20%. Increased home equity allows greater access to funds through a Home Equity Line of Credit (HELOC) or a home equity loan. These tools can provide capital for home improvements, debt consolidation, or other financial goals, using the home’s appreciated value as collateral.

Impact on Property Taxes

A higher appraised value can influence property tax obligations, though the impact is not immediate. Local tax assessors determine a property’s assessed value, which is the basis for calculating property taxes. While an appraisal establishes market value for transaction purposes, assessed value for tax purposes is determined by local authorities through their own processes.

Assessments often occur on a regular cycle, such as annually or biennially, depending on the jurisdiction. If a property’s market value increases, as indicated by a high appraisal, local assessors may reflect this appreciation in future assessed values. An increase in assessed value, when multiplied by the local tax rate, can lead to higher annual property tax bills for the homeowner. Homeowners receive a notice of their assessed value and can appeal if they believe it is too high.

No Direct Impact on Purchase Price or Financing

A common misconception is that a high appraisal alters the agreed-upon purchase price. A high appraisal does not change the contract price between the buyer and seller. The purchase agreement is a binding contract, and the appraisal itself does not provide grounds for either party to renegotiate the price upward. The transaction proceeds at the original agreed price, even if the appraisal indicates a higher market value.

A high appraisal poses no issues for mortgage approval. Unlike a low appraisal, which can jeopardize financing by indicating the property is not worth the loan amount, a high appraisal means the lender’s collateral is more secure. The loan amount is based on the lower of the purchase price or the appraised value. While a high appraisal confirms the property’s value supports the loan, it does not lead to a higher loan amount than initially requested.