You likely remember what you paid for your home. But do you know what your home’s value is today? Even if you’re not planning to sell your home or buy a new one, it’s still a good idea to know what your home is worth — because it’s probably one of the biggest investments you’ve made.
It can be confusing, however, because you can find as many as three different values for your home at any given time — assessed value, fair market value, and appraised value. Which of these reflects the true value of your home?
To answer this question, let’s review the three common ways value is assigned to your home.
A county or municipal tax assessor will evaluate the features of your home and then compare it to similar homes in your area. From there, a monetary value is assigned to your home, which is used to determine how much you’ll pay for property taxes. These taxes may be used to fund schools, emergency services, and other local government programs. Usually, the assessed value of your home is less than its fair market value or appraised value.
Your home’s assessed value may not be reviewed annually, so it’s a good practice to learn how it’s done. If you feel the assessed value of your home is incorrect, you may appeal it and your property will be reassessed. You must understand, though, that any reassessment will impact your property taxes — whether positively or negatively.
Fair Market Value
The fair market value (or FMV) of your home reflects how much a typical buyer will “reasonably” pay for your home if you plan to sell it. It tends to be the best measure of your home’s value because it’s based on supply and demand. For example, a “seller’s market” is when there are more buyers than homes available on the market. In this case, you may be able to sell your home at a higher price than in normal market conditions. On the other hand, a “buyer’s market” occurs when there are more homes for sale than potential home buyers, which may give buyers more negotiating power.
The FMV is determined by looking at similar homes sold in your area. Many times, people will turn to online home valuation tools to determine the FMV for their home. While these are good tools, they merely provide estimates. It’s a good idea to combine your online research with a Competitive Market Analysis (or “comps”) prepared by a licensed real estate agent. The analysis gives you a complete look at home sales in your area and provides a good price range for selling or buying your home. If you price your home within its FMV range, you may be able to sell it faster. Conversely, setting a sales price above its FMV may stall the sale of your home.
The appraised value of your home is determined by a licensed appraiser who carefully reviews certain factors, including:
- The region, city, and neighborhood where your home is located
- The characteristics of your home (including any unique features or improvements made) and the land upon which your home is built
- Sales, listings, vacancies, depreciation, and other factors for similar homes in the market
The appraised value of a home is used by lenders to underwrite the financing for a home purchase or the refinancing of a mortgage. It’s also used by insurance underwriters to approve homeowners insurance policies. The appraised value is generally similar to the FMV.
Whether you’re buying, selling, or refinancing your home, the appraised value is critical to the process:
- As a buyer, if you’re interested in a home that’s appraised for less than the asking price, you may be able to negotiate a better price with the seller.
- If you’re selling your home, the appraisal will help you determine a stronger listing price (in conjunction with the FMV).
- If you plan to refinance, the appraised value of your home tells you how much equity you have. When you refinance, you may be able to borrow some of your home equity by increasing your loan amount and use those funds for large purchases or home improvement.
Which type of home value reflects the true value of your home?
It depends on how you need to use it. Each assigned home value is important in its own right, and each is an important tool for different purposes. If you have questions about your home’s value as it relates to your mortgage, talk to one of our home mortgage consultants.