What Do Banks Use to Determine House Value & Home Equity?

Lenders use home values for loan approvals.

Banks generally use three methods to determine the value of a home: an appraisal, a broker's price opinion (BPO) or an automated valuation model (AVM). Any of those values can be used to determine the owner's equity, as well.

Appraisal, BPO and AVM Defined

A property appraisal is an opinion of a home's value based on recent sales of comparable properties and prepared by a licensed appraiser. A BPO is an estimation of the likely market value or sales price of the home prepared by a real estate broker or salesperson. An AVM is a computerized valuation that uses algorithms based on recent sales of other homes in the area and price trends.

How Valuations Methods Compare

An appraisal is typically more expensive and takes longer than a BPO, which is more likely to reflect price trends in the market. An AVM is cheap and removes the human element from the valuation, but is not always as accurate as an appraisal or BPO.

How To Calculate Equity

Equity is the difference between the value of the home and the total of the outstanding loan balances, expressed as a percentage. If a home was worth $100,000 and the owner had a first mortgage of $70,000 and a second mortgage of $20,000, the equity would be $10,000 or 10 percent.

References

• NationalMortgageProfessional.com:Appraisals, BPOs and AVMs
• Bankrate.com:Home Equity Calculator