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We purchased our home a year ago at a not-terrible rate, but we are now considering refinancing for a shorter term at a rate nearly 2% lower. We have about 20% equity in the house, and do not plan to cash any of this out.

For the refinance, I know that an appraisal will need to be completed.

I currently have two ongoing projects in the house, for which I am doing the work myself (with assistance from a licensed contractor in the family):

  • Adding a second full bathroom in addition to the existing, functional full bathroom. Plumbing/framing/electrical and some finish work is complete.
  • Adding a detached single-car garage (there is currently no garage). Concrete work and some framing is complete (no roof yet).

I have permits for both projects and they have passed all required inspections up to this point.

If needed I could hurry up and finish the bathroom in a month or so, but given that it's winter in Wisconsin, I am unlikely to have the garage finished before May/June at the earliest.

If I were to pursue refinance now, will the fact that these projects are unfinished impact my appraisal? Positively or negatively?

  • How much equity do you have in the house? Are you planning to cash out any equity? As long as the house can be sold "as-is" for more than what you're borrowing it shouldn't be a problem. – D Stanley Dec 9 '19 at 22:10
  • @DStanley I added these details in the question. You say it shouldn't be a problem -- in what case would it be? – LShaver Dec 9 '19 at 22:17
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    It absolutely could be a problem. The important part of DStanley's comment is as long as the house can be sold "as-is" If you have the kitchen torn apart or no functioning bathrooms, you'll probably have a problem with a lot of lenders. – quid Dec 9 '19 at 22:34
  • Do you have all the permits and inspections for those additions? – mhoran_psprep Dec 9 '19 at 22:40
  • @mhoran_psprep yes -- added these details to the question. – LShaver Dec 9 '19 at 22:49
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The issue for the bank is that if you were to stop work today, will the house value be enough to cover their risks, and still have you be able to claim 20% equity. While it is true that the finished improvements should make the house more valuable, it isn't true that half done ones will make it more valuable. It can be viewed as dragging the value of the house down because of the unfinished state.

I would think it would be safer to wait until all the major projects are done, so that they can put a proper value on the completed house and garage.

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You stated,

We have about 20% equity in the house...

Did you base that figure on the current state or after the completed repairs? That should be the answer to your question.

Note, even if you come in a little below 20%, you can still avoid PMI by bringing some cash at closing to cover the difference. For example, if you owe $206K and your house appraises at $250K, the bank may only lend you $200K without PMI, so you can bring $6K to closing to bridge the gap. Though if that digs into your repairs account enough to prevent you from doing the repairs right now, I'd just do the repairs first. If you have enough either way, I'd probably refi ASAP since the worst case scenario is you have a smaller mortgage and start paying even less interest per month in conjunction with the lower rate. And, who knows if mortgage rates will still be as low as they are today in 6 months when the garage is done.

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You asked,

If I were to pursue refinance now, will the fact that these projects are unfinished impact my appraisal? Positively or negatively?

Based on the rather significant scope of your projects, it's likely there will be an impact. "Positive or negative" can't really be answered without a frame of reference and - of course - knowing the details of the work and what remains. Certainly, your home will appraise lower than what it would after the work was finished. But I think your real question is, will it appraise higher than it would have before you started the work?

That's a harder question to answer, and while we cannot predict the outcome of your appraisal, we can explain the process.

Appraisals are largely based on comparisons to similar homes in your area. But, of course, homes that are the same "by the numbers" may be worth different amounts, so there are subjective factors in the appraisal process that account for that. Condition is a major factor which typically comes into play when a home has unfinished work.

Typically, once you begin work on adding or finishing additional space, your home would be described as including those additional spaces, but with value taken off to reflect "condition" of the spaces because of the unfinished work. (Some appraisers take this to an extreme - if you've got an unfinished attic space, it counts as unfinished space. But hang a sheet of drywall on the studs, and suddenly it's a normal old finished room, with a huge hit because of it's "condition.") A partially finished remodel is essentially treated the same as if that new room was 20 years old and starting to fall apart. In both cases, the appraiser would include the bathroom or garage, but deduct value based on an estimate to complete the work.

So, if the work is going to add $50k in value, and it will cost $20k to complete, you can assume a $30k increase in your home's value compared to what it would have appraised at before the work began. But - anecdotally, in my experience, the standards used by appraisers to estimate work is probably going to come up with a higher number than most homeowners DIY'ing a project will estimate to complete the work. So if it's going to add $50k in value, and you think it needs $20k to complete, the appraiser may think it needs $50k to complete, and you end up flat.

Ultimately, the only way to find out what an appraisal will come in at is to get one done. But if you're working with a contractor family member who knows your area well, they may be able to give you rough estimates on both the increase in value and the cost to complete the work, and you can use those numbers as a rough guide.

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