A home appraisal is necessary during the process of buying and selling a home as well as a refinance of an existing mortgage. A refinance is when a loan or mortgage is reevaluated and updated to current interest rates and new terms. An appraisal determines the value of the home to ensure that the price reflects the home’s condition, age, location, and features such as the number of bathrooms.
Also, appraisals help banks and lenders avoid loaning more money to the borrower than what the house is worth. In the event of default, which is when the borrower can't make the payments anymore, the bank uses the appraisal as a valuation of the home.
If the home is in foreclosure whereby the bank takes possession of the house, it must be resold to help the lender recoup any losses from making the mortgage loan. It's important to remember that when a bank lends for a mortgage, it gives the full amount of the home's value to the seller on the date it's sold. In other words, the bank is out the money and in return, has a promise to pay, plus interest, from the borrower. As a result, the appraisal is important to the lending process since it helps the bank avoid losses and protect itself against lending more than it might be able to recover if the borrower defaults.