Buying a home can be a bewildering process, and mastering the finer points of homeownership takes time. Becoming familiar with the related terminology can be like learning a foreign language. Among the most frequently confused terms are appraisal and assessment. What’s the difference?
Appraisals usually take place when a hired appraiser calculates the fair market value of a home for lending purposes. Because banks typically won’t lend you more than a home is worth, the amount of your mortgage may be determined based on the amount for which the home appraises. Fair market value (FMV) refers to the estimated price for which the house would likely sell under current market conditions. This figure is most easily determined by the sales price (if the home recently changed hands), but in the absence of a recent sale, FMV can be calculated through other means including an analysis of recently sold comparable properties.
Assessments occur in a taxation context and are undertaken by your county’s tax assessor board in order to determine how much you owe in property taxes. Theoretically, homes are assessed annually. In reality, reassessment is formulaic and generally occurs only every few years to account for a standard estimated rate of appreciation or whenever there’s some noteworthy event such as a sale or inheritance. Assessments usually amount to approximately 40% of a given property’s appraised value (which is based on FMV), but other factors can figure into the equation as well (e.g., the size, age, condition, and location of the property).
Knowing the difference between these two terms will help make the home buying process a bit easier!