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What’s the Difference Between Your Home’s Market and Assessed Value?
The monetary value of your home can vary widely based on the purpose of the appraisal.
Understanding your home’s value is an important part of knowing your net worth, what you’ll likely receive if you sell the property and how the local real estate market is faring. Home value is also an integral part of determining how much property tax you’re required to pay the local and state government annually.
But depending on where you look, the value may appear as wildly different numbers. Different valuations can mean different things and are often used for different reasons. The two types you’ll most likely encounter are market value and assessed value.
Market value is the estimated amount active buyers would currently be willing to pay for your home. Your home’s market value is determined by an appraiser, who is typically hired when your lender is deciding how much money to provide in a loan or you are setting the list price when putting your home on the market.
Assessed value, on the other hand, takes the market value and puts it in the context of your property taxes. In many counties throughout the U.S., assessed value is a portion of the market value, calculated as a percentage of the market value of the property. As a result, the assessed value of a property is typically lower than appraised market value.
Danielle Hale, chief economist for real estate information company realtor.com, explains that market value is based on the expectation that the property would sell during the period the value is calculated. “When people think about home values, they often mean, ‘This is the price that I could sell it for if I were to sell it today,’ or ‘This is the way a bank would value it if I were to go talk to the bank about getting a home equity loan or maybe refinancing my mortgage,’” she says.
The grayest area of a market value is determining whether the value you assign to your home is based on what current market conditions say a person would pay for your house or what you think a person should pay for it.
For this reason, basing market value on recent sales of similar properties is key to ensuring the number is as accurate as possible. Professional appraisers are an instrumental part of being able to examine a property, nearby recent sales and the factors that may add to or detract from interest in a property, and then assigning a value to the house based on the information.
Appraisers are often hired by a lender, and it’s best if they are are local to the area so they understand nuances that may not be obvious to an out-of-towner, though sometimes an algorithm will be used to determine values on a larger scale or more quickly. A lender can have a property valuated to issue a mortgage for a home purchase, for refinancing or to issue a home equity loan. Individual homeowners can also order their own appraisal to get a better understanding of their home’s current value if they’re considering selling but don’t know what the asking price should be, or simply to get a better grasp on their net worth. An appraisal typically costs between $300 and $400, according to Angie’s List, and is paid by the homeowner for personal use and the buyer for a lender-required appraisal.
An appraisal looks at the sale information of nearby homes with a similar square footage, age, number of bedrooms and other features of your property that have sold recently – most often in the last six months. Appraisers will also factor in major differences that may make your home’s valuation different.
Home value estimates can also be found for free online with tools like Zillow’s Zestimate, realtor.com’s My Home tool or the Federal Housing Finance Agency’s House Price Calculator, but these are unlikely to be as accurate as an appraiser. Hale says online tools serve as a great jumping-off point, but they fail to take into account current and local events that may play a more immediate factor into buyer interest and the ultimate value. “Market conditions can affect that valuation,” Hale says.
Market value even becomes part of the calculation of your home’s assessed value. But because assessed value is used for the sake of calculating how much you owe in property taxes, the assessed value is also based on laws of your state, county and even city, explains Margie Cusack, research manager for the International Association of Assessing Officers.
“The assessed value will be defined by the legal framework of that jurisdiction,” she says. “A lot of states have value limitations in law, so they might have a market value for the property. But then they have a per law allowable assessed value that they work off of, so it becomes very localized.”
Because of the specificity of assessed value to your exact location, Cusack recommends all homeowners – as well as homebuyers who don’t yet pay property taxes – become well-versed in the statutes that apply to the area, how the assessment is calculated and where your property taxes go.
The exact steps to assessing a property also vary by jurisdiction. Some assessor’s offices will use a predictive algorithm to help determine assessed values for more properties quickly, while others will address assessments on an individual, in-person basis, Cusack says.
Many assessors’ offices keep online databases open to the public that allow you to access information on the history of your property – including the deed from previous sales – and information that factors into the assessment of your property.
What if You Disagree With Your Home’s Value?
At times, homeowners will disagree with the appraised or assessed value assigned to their property. In both scenarios, there are options for contesting the valuation.
For market value, a homeowner or buyer may be able to request a property be appraised a second time with new information the appraiser may not have been aware of before – a finished basement, for instance, can change the value of a home if it can be counted in the square footage. An appraiser may be willing to take a second look at the property without extra charge if something was missed, but you may also need to pay for another complete appraisal to have your house fully reevaluated.
When it’s a lender issuing the appraisal and considering the value, however, there’s not much chance you’ll be able to convince the lender to change his or her mind on issuing a loan or refinance.
How to Maximize Increases in Your Home Value
Take advantage of your growing equity to borrow and improve your house.
U.S. homeowners with mortgages have seen their home equity increase nearly 12 percent year over year, according to CoreLogic’s recent home equity analysis. That represents a gain of almost $871 billion since the third quarter of 2016. Most homeowners recognize that having more equity in their homes is a good thing, but do they know how to leverage it – and capitalize on it?
Savvy homeowners are leveraging this jump in home equity through home equity lines of credit, or HELOCs. A HELOC is a line of credit extended to a homeowner that uses the borrower’s home as collateral. Borrowers are pre-approved for a certain spending limit based on the equity they have accrued in their home and can draw against this limit for various uses.
This kind of loan option is particularly popular for those who are financing home repairs after the long, harsh winter and for those who are looking to renovate their homes and outdoor spaces for the warmer summer months. In fact, TD Bank’s recent Spring Home Lending Survey found that property values have increased over the last 12 to 18 months for 69 percent of respondents, and close to half (42 percent) said that they are somewhat, very or extremely likely to apply for a HELOC within the next 18 months.
Compared to borrowing funds from short-term loans or using a credit card, one of the reasons HELOCs are attractive is because they’re one of the lowest-cost borrowing options for a homeowner. They also give borrowers the freedom to choose between a fixed or variable interest rate option.
A fixed-rate option can save customers money by not only dropping their interest rate, but also allowing them to pay off the debt in a time frame they choose. HELOCs can also be helpful in consolidating debt at a lower interest rate. Borrowers have immediate access to low-interest funds, which can be useful for those who are looking to pay off debt.
Putting Money Back Into Your Home
Following a tough winter, many homeowners are dreaming of updating their patio furniture, putting in a pool or adding a garden, and are leveraging the boom in home equity to do so. TD’s survey also found that the most popular uses for HELOCs were home renovations and repairs (53 percent), major home purchases like appliances (28 percent) and debt consolidation (26 percent). An added benefit for those financing a home renovation with a HELOC is that some of the costs may be tax deductible.
For those who are using a HELOC to finance repairs and renovations, the most common updates needed are window replacements (35 percent), and heat or air conditioning system replacements (33 percent), and structural repairs (32 percent). The top three cosmetic renovations are bathroom updates (37 percent), kitchen updates (36 percent) and exterior painting (26 percent).
HELOCs are also a sensible option for those looking to increase their home’s value to sell during the summer homebuying season. More than one-third of respondents looking to renovate said they’re doing so to increase the value of their home. Potential sellers should get smart on what can derail a home inspection, however, like a leaking water heater or a loose shingle on the roof, and consider leveraging a HELOC, which can then be paid off at the closing table during a sale.