Why Understanding Assessed and Market Value Matters for Mortgages
If you’re a homeowner or looking to buy a home, you’ve likely encountered the terms “assessed value” and “market value.” While they may sound similar, they serve different purposes—and understanding these differences can significantly impact your mortgage decisions.
The assessed value of your property is determined by local governments for tax purposes. It’s a figure that helps calculate how much property tax you’ll owe. On the other hand, the market value is the estimated price your home could sell for on the open market. This is the value lenders focus on when you’re considering refinancing, taking out a home equity loan, or negotiating mortgage terms. By understanding both values, you can make more informed decisions about your mortgage and financial future.
The Impact of Assessed Value on Your Property Taxes and Mortgage Escrow
Your home’s assessed value plays a critical role in determining your property taxes, which are often bundled into your monthly mortgage payment via an escrow account. Local tax authorities assess the value of your home periodically to set the amount of taxes you owe. This value is generally lower than your home’s market value, but if it increases, so will your property taxes—and by extension, your monthly mortgage payment.
When the assessed value of your property rises, your mortgage escrow account may not have enough to cover the increased taxes, leading to higher monthly payments to make up the difference. This is why it’s important to keep an eye on your property’s assessed value and periodically review your mortgage escrow payments to avoid surprises. For many homeowners, understanding how changes in assessed value affect their mortgage is key to managing overall household expenses.
The Role of Market Value in Refinancing and Home Equity Loans
When it comes to refinancing or taking out a home equity loan, the market value of your home is the figure lenders care about most. Unlike the assessed value, which is used for taxes, the market value is an estimate of how much your home could sell for based on current real estate conditions.
If you’re thinking about refinancing your mortgage to lower your interest rate or secure better loan terms, the lender will order a home appraisal to determine the current market value. The higher your home’s market value compared to your mortgage balance, the better your refinancing options may be. Similarly, if you’re applying for a home equity loan, lenders will use the market value to calculate how much equity you can borrow against.
For instance, at Federal Hill Mortgage, we offer competitive refinancing products, including no-cost refinancing options. The key to getting the best deal on these products lies in knowing your home’s market value, as it directly influences your loan-to-value ratio, which lenders use to assess risk.
Mortgage Loan Limits and the Influence of Assessed and Market Values
Assessed and market values can also play a role in determining the types of loans available to you. For example, FHA loan limits and conventional mortgage limits vary based on the value of homes in your area. If your market value is significantly higher than your assessed value, you may have greater leverage in negotiating loan terms.
Local loan limits are often influenced by property values in your area, and if your home’s market value has appreciated, it could open up opportunities for larger loan amounts. For homeowners in high-cost areas, where market values tend to exceed assessed values by a wide margin, this can be especially advantageous when seeking FHA loans or other government-backed mortgage options.
Why Accurate Market Value Matters When Buying a Home
For homebuyers, market value is just as important as it is for homeowners looking to refinance. Lenders require a property appraisal to determine the market value of the home you’re purchasing. This ensures that they aren’t lending more than the home is worth, which protects them in the event of foreclosure.
If the appraisal comes back lower than the agreed-upon purchase price, you may have to renegotiate the price or come up with the difference out-of-pocket. At Federal Hill Mortgage, we help clients navigate this process by ensuring they have accurate pre-approvals based on realistic market values. This helps avoid complications later in the buying process.
Conclusion: Keeping Both Values in Mind
Understanding both assessed and market values is crucial when making decisions about your mortgage, refinancing, or home equity loans. While assessed value affects your property taxes and monthly escrow payments, market value determines the options available to you when refinancing or borrowing against your home’s equity.
Before you take the next step—whether it’s refinancing or exploring home equity loans—review your tax assessments and consider getting a current market appraisal. If you’re unsure about your options, contact Federal Hill Mortgage to explore how we can help you with refinancing or home equity loan products tailored to your financial needs.
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