Mortgage Basics
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What is an Appraisal?
For mortgage purposes, an appraisal is a professional opinion or consultative valuation report on the market value of your property supported by the presentation of relevant data analysis.
All reports will demonstrate either one or more of the three basic data-processing methodologies used to arrive at an indication of value:
- The Cost Approach estimates the cost of building a new property identical to the subject being appraised, based on current prices, and subtracting accumulated depreciation and adding the estimated land value.
- The Income Approach may be used for income-producing properties and is based on the theory that the value is the present worth of the income stream the property is capable of producing when developed to its fullest use. The net operating income from the property is capitalized into value by the appropriate method and rate.
- The Direct Comparison Approach is based upon the theory that an informed purchaser would pay no more for the property than the cost of acquiring another existing equivalent property. The value estimate is based on the selling price of comparable properties.
Most lenders will use the market value arrived at by using the Direct Comparison Approach for your mortgage financing.