A home’s value will come into question when a homeowner wants to refinance their mortgage, use their equity, sell their home, or face capital gains taxes. All that to say — it’s useful to know how much your home is worth.
Once you understand how to determine home value and what factors can affect home prices, you will be better prepared for your next real estate transaction.
Learn more: 7 ways to build equity in your home
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“Since the home is one of the [your] most valuable asset, it’s important to be aware of its value, just as knowing how much is in your bank account can help you make prudent financial decisions,” said Realtor Associate Andrea Saturno-Sanjana via email.
You will need to know the value of the property when:
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Plan to buy or refinance it.
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Need to sell due to divorce, inheritance, relocation or other reasons.
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Looking to tap into your home equity with a cash-out refinance, home equity loan, or home equity line of credit (HELOC).
Dig deeper: HELOC vs. Home Equity Loan — Tap into your equity when rates are high
Several factors can affect the value of your home, including those you can control and those that are out of your hands.
Read more: When will the real estate market crash again?
Your home has three different values: appraised, fair market, and appraised. Here’s how each one works:
The estimated value of your home is the informed, professional opinion of a licensed professional. However, the appraiser’s estimate is not necessarily the amount you would get from the sale. Depending on economic conditions and personal preferences, buyers may offer more or less than the appraised value.
Fair market value is what a home buyer is willing to pay for a property. “It can change quickly and is greatly affected by many factors, including supply and demand, condition, location, features, interest rates and more,” Drew Heberer, founder of Heberer Homes, said via email.
Dig deeper: What is the difference between a home’s appraised and market value?
The assessed value determined by the tax assessor is the value that the county or local government assigns to the residence for calculating your property taxes. The tax assessor takes into account the type of property, the square footage, the year of construction and the size of the lot. Generally, the assessed value is a percentage of the fair market value.
“Homeowners may qualify for a tax exemption, which reduces the property tax they pay as individuals without changing the assessed value of the property itself. “Some local governments have an appeals process in case a homeowner wants to challenge the assessed value of their property,” Saturno-Sanjana said.
Read more: How do property tax deductions work?
There are several ways to determine the value of your home, including the following:
If you have the time and will, you can get a solid idea of the value of your property without spending a cent. First, review your county’s tax records and note the assessed value of your home.
Then enter your home’s address into an online appraisal tool, such as Zillow, Redfin, or Realtor.com. You may want to try multiple tools to see if they generate the same result.
You can then take it a step further by using the tool to view other properties in your area. Heberer said it might be a good idea to focus on homes sold in the past year that are similar to yours in terms of size, age and number of bedrooms and bathrooms. You can also check the prices of comparable homes currently for sale (often called “companies”) and gauge general demand based on how long the homes have been on the market.
Finally, use it Federal Housing Finance Agency Real Estate Price Index Calculator. Based on repeat sales of single-family homes backed by Fannie Mae or Freddie Mac since the 1970s, it estimates the current value of your residence assuming it has appreciated at the average rate of other properties in your area.
If you’re buying a new home, it’s wise and common for a real estate agent to compile a comparative market analysis (CMA). Most estate agents offer this service free of charge as part of their regular duties.
Similar to what you might do on your own, your real estate agent will analyze recent public sales data for homes comparable to your target property. They will rely on their market expertise and take into account location, size, age, build quality, property taxes and final sale price. They may also be able to access information that you cannot if you contact the listing agents for more details.
“The most accurate method would be to hire an appraiser to do a full appraisal (not a vehicle appraisal),” Heberer said. During the process, an authorized appraiser will assess the condition, contents and upgrades of the residence. It will also consider recent nearby comps.
If you’re buying a home, your mortgage lender will require an appraisal to make sure they’re not lending you more money than the property is worth. Although the price can vary depending on the size of the home, estimates are usually several hundred dollars.
Dig deeper: How a home appraisal works and how much it costs
The value of your home can change during your ownership. Below are some common reasons why your property may increase or decrease in value.
The value of your residence could increase if you do any of the following:
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Refresh your home by remodeling your kitchen, bathroom or landscaping.
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Install a new roof or HVAC system.
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Increase usable living space by adding or finishing your attic or basement.
On the other hand, the value of your home can drop if you experience any of these situations:
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Your property deteriorates due to deferred maintenance, natural disaster or some other reason.
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The values of other homes in your neighborhood are declining.
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Local authorities change zoning laws or environmental factors, such as building a busy road in front of your house.
Although it hasn’t happened often in the past decade or so, the value of your property can also decrease due to poor economic conditions, mortgage expert and author Anna DeSimone said via email.
Read more: Why are house prices so high?
Each type of home appraisal has its own purpose. The assessed value determines how much you will pay in property taxes (before possible exemptions). The appraised value dictates how much you can borrow to purchase or refinance a residence. Fair market value is what a buyer is willing to pay for your home.
You can get the best return on your investment by spreading your remodeling budget across several areas of your home. “For example, if $30,000 is spent on a large patio and barbecue, [the] property value will increase slightly. But spending $10,000 to replace the windows, $10,000 to refresh the kitchen cabinets, and $10,000 on a smaller patio will increase [the] property value even higher,” DeSimone said.
If the value of your home decreases, you may have negative equity. This happens when you owe more to the bank than your home is worth. If you decide to sell your house in this situation, you must make up the difference. You may also have difficulty selling your home — especially if you’ve put off major maintenance and repairs to the property, Heberer explained.
This article was edited by Laura Grace Tarpley.
