When you are requesting a loan, buying a home using a mortgage, refinancing your existing mortgage, wanting to know the amount of equity in your home, the home appraisal is a key component.
An appraisal is an unbiased professional opinion of a home's value. Appraisals are almost always used in purchase and sale transactions and commonly used in refinance transactions. In a purchase and sale transaction, an appraisal is used to determine whether the home's contract price is appropriate given the home's condition, location and features. In a refinance, it assures the lender that it isn't handing the borrower more money than the home is worth.
Lenders want to make sure that homeowners are not over-borrowing for a property because the home serves as collateral for the mortgage. If the borrower should default on the mortgage and go into foreclosure, the lender will recuperate the money it lent by selling the home. The appraisal helps the bank protect itself against lending more than it might be able to recover in this worst case scenario.
In regards to Property Equity, if it is over 80% of your bank loan, you won't be required to pay the extra PMI in your mortgage payment. Private Mortgage Insurance, or PMI, is a supplemental insurance plan that most lenders ask home buyers to purchase when the amount being loaned to the homebuyer is more than 80% of the actual value of the real estate. This additional payment is often bundled into the monthly mortgage payment and is quickly forgotten. PMI isn't required when the leftover balance of the loan - whether through market appreciation or principal pay down - falls below the 80% level. An appraisal will give you the value of your home, and the cost of the appraisal can often be offset in little time because you'll no longer be paying the PMI.