By Mike Silvestri
Q: A little more than a year ago, we refinanced our home and had an appraisal done. Recently we had a realtor come out to evaluate our property in hopes of putting it on the market to sell, but we were disappointed that the current market value was lower than the appraised value from the lender. Which value is right, appraised value or market value?
A: Both. Fair market value is defined as “the most probable price in terms of money that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.” Wow, there’s a definition!
OK, let’s break it down. Lenders require an appraisal to qualify the property and make sure that the property value supports the loan being made against it. Appraisers use a standardized method to determine value, such as neighborhood influences, property condition, improvements, interior finish, square footage, etc., and do not necessarily appraise for fair market value, particularly where refinancing is sought.
Your realtor most likely used a method based on “comparable sales” to determine the value of your home. As you found out, this is not always the same number as appraised value. More important than the appraised value in the sale of your home will be marketing: attractively pricing your home (possibly lower than the appraised value) to get the most buyers interested in making an offer will ensure the highest possible sales price.
Many factors make up value; ultimately it comes down to what a buyer is willing to pay and what a seller is willing to accept. Everything else is speculation.
Q: We are purchasing a home, and when we met with our lender we were quoted an interest rate, but that interest rate changed when we went to lock the rate. What’s going on here? Is the lender doing the ol’ “bait and switch?”
A: It’s easy to be suspicious when you’re offered something but get something else. In this case, the rate you were offered was not locked, and therefore not guaranteed. Locking in rates is a bit of a gamble: Lock too early and the rate may improve; wait too long and the rate may go up. But consider that both you and the lender are making the same gamble in trying catch the perfect market situation.
An important component to locking a rate is time frame: How many days are you asking the lender to hold the rate (i.e. 15 days, 30 days, 60 days)? The longer you ask the lender to hold the rate, the higher the rate.
For example, let’s say your purchase is closing in 35 days. Are you willing to take a 60-day lock at 6 percent to protect against the threat of the mortgage market changing and moving above the rate you locked, say 6.25 percent? Or are you a risk taker who is going to wait out the five days and hope the market gets better, maybe 5.75 percent?
The best way to handle market changes and locking is with the help of your lender. Tracking rates daily should give you a trend of how the markets are moving, along with understanding what market indicators may affect interest rates going forward.
Mike Silvestri is founder and managing partner of Los Altos Mortgage Co., specializing in residential lending. Send your questions to mike@lostaltosmc.com.
