Understanding appraisal vs. assessment

Everyone knows that real estate is a valuable asset, but figuring out precisely how much a home is worth can be complicated. You’ll often hear the words “appraisal” and “assessment” used when discussing the value of a home. These words mean similar things, and it’s easy to mix them up, but they are used in two different contexts.

Home appraisals are used by lenders to confirm that a home’s value is enough to secure the mortgage you want to use to buy it. Home assessments are used by local governments when determining property taxes.

We’ll break down the key differences between appraisals and assessments, when each is used, and what you need to know about how they work.

Appraised value vs. assessed value: What’s the difference?

Both home appraisals and assessments relate to the value of your property, but they’re used at different times. Appraisals are used when buying, selling, or refinancing a property, while assessments influence how much you pay in property tax.

Appraisal value

A home appraisal is used to determine the fair market value of a home. In other words, how much a seller can reasonably charge for the home based on the prices of similar sales in the area and other factors about the property.

Typically, when someone buys a home with a mortgage, the lender will hire an appraiser to examine the home and determine its appraised value. This lets the lender confirm the home is worth enough to serve as collateral for the loan.

For example, if you want to buy a home for $400,000 and plan to get a $375,000 mortgage, but the home only appraises for $350,000, the lender will likely decline your application because the home isn’t worth enough to protect the lender in the case that you default.

Appraisals are also used when refinancing to determine if you can refinance and how much cash you can take out if you’re getting a cash-out refinance.

Assessment value

Unlike appraisals, which are conducted on behalf of lenders, assessments are conducted on behalf of your local government. City and town governments collect much of their money from property taxes.

Typically, an assessor will examine your home and determine its assessed value based on the recent sale of similar homes, its square footage, market trends, and other features. The assessor may or may not physically examine the home.

In some areas, exclusions that reduce your home’s assessed value for certain purposes are available. For example, owner-occupants may be able to exclude a portion of their home’s value from the assessment, reducing the tax they pay. Your property tax bill will be based on the home’s assessed value and your area’s tax rate.

How do appraisals work?

When you want to buy a home or refinance your property, the lender will likely want to conduct an appraisal. The appraisal will typically follow this process:

1. The lender hires a licensed appraiser and requests that they appraise the home

2. The appraiser works with the homeowner to schedule the appraisal

3. The appraiser visits the property and conducts a visual inspection, usually of both the interior and exterior of the home

a. Points of interest include things like the building materials, condition of the home, features such as HVAC or plumbing, home size, and number of bedrooms or bathrooms

4. The appraiser then compares the property to similar homes in the area

5. The appraiser provides an estimate of the home’s value based on their findings and the sales prices of similar homes in the area

Home appraisals typically take a few weeks and cost a few hundred dollars. If you’re getting a mortgage or refinancing, expect this cost to be rolled into your closing costs.

How do assessments work?

Home assessments are used by local governments to determine how much to charge in property taxes. The precise process can vary from place to place, but it looks something like this:

1. Your local government determines the property tax rate for the coming year and the method for determining home values

2. An assessor who works for the local government reviews property data and visits homes in the area

3. Using the information on record, findings from visits to properties in the city or town, and recent home sales data, the assessor determines the value of each property in the city or town

a. Important data includes things like the size of the property, the number of bedrooms and bathrooms, sales prices of comparable homes, and prior years’ assessed values

4. The assessor provides the assessed values to the local government, which then sends tax bills based on the tax rate and the value of your home

Property taxes are then used to fund important government functions, like road repair, schools, emergency services, parks and recreation, and more.

The bottom line: Appraisals and assessments serve two distinct purposes

Appraisals and assessments are both about determining the value of a home, but they’re used for different things and by different people. Appraisals are used by lenders to ensure a home is worth enough to serve as collateral for a mortgage. Assessments are conducted by local governments and used to determine property tax bills.

If you’re ready to start buying a home but aren’t sure where to start, Rocket Mortgage® is here to help. You can begin the application process today.