When buying or selling a home, it’s helpful to realize that both the market value and the appraised value can impact the process. The market value might help to determine a sale price between buyer and seller, but lenders are more interested in the appraised value, which helps them confirm the home’s value before moving forward with a loan.

This guide explores the differences between the appraised value and market value of a home and why the difference matters.

Market Value vs. Appraised Value: Key Differences

Market values and appraised values both impact the home purchase process, though the level of impact differs.

What Is Market Value?

The fair market value (FMV) of your home represents what the house might sell for on the open market. You won’t find a formula to define FMV; instead, the housing market pushes the home’s value up or down based on factors like supply and demand. Note that the FMV is an approximate estimate and likely not exactly what the home may be bought or sold for. FMV doesn’t take into account what a individual homeowners and buyers might be willing to accept.

How House Market Value Is Determined

A home’s market value can change quickly. A few factors that impact the market value of a home include:

• A seller’s market: A limited supply of homes in a high-demand area could push home values higher.
• A buyer’s market: In contrast, a large supply of homes in a low-demand area may lead to falling home values.
• Size and features: A home with more square footage and features will likely be valued higher than a smaller home in a similar location.
• Location: The right location can significantly increase a home’s value, but a less desirable location can lower it.
• Home age: Older homes tend to be less valuable than newer builds, presumably because they are perceived as needing more repairs and lacking features that might be currently desirable.

How Market Value Is Used When You’re Buying a Home

When a home is put on the market, real estate agents and sellers often try to price the home at or around market value. A seller might price the home higher if they aren’t in a hurry to sell or lower if they want to move on quickly.

As an interested buyer, you can choose to make an offer that’s higher or lower than the list price. Since home prices reflect current demand, you might choose to offer above the list price in a hot market or below the list price in a slow market.

Keep in mind that the market value comes into play well before the appraised value does, as that won’t be determined until the closing process.

Assessed Value vs. Market Value

In addition to the market value and the appraised value, you might also come across the “assessed value” of your home. Unlike the market and appraised values, the assessed value isn’t used in the buying or lending process, which means it won’t impact the purchase price, appraisal, or loan amount. Instead, the assessed value is used to calculate property taxes.

What Is Appraised Value?

During the lending process, the appraised value of a home is determined by a professional appraiser. Typically, a lender will request an appraised value of your home during the process of buying or refinancing.

Lenders require this appraised value to confirm they aren’t lending you more than a particular home is worth. It’s also used to calculate the loan-to-value ratio (LTV).

The appraised value may be higher or lower than the market value. For example, if market conditions are hot, the market value might be higher than the appraised value.

How Appraisals Can Impact Your Home Loan

When buying a home, if the appraisal value comes back lower than the market value, it could throw a wrench into your financing plans. One option is to ask for a second opinion to correct any potential issues with the original appraisal.

Depending on the situation, a low appraisal could mean that you’ll need to make up the difference between the appraised value and the sale price. Alternatively, you could renegotiate the sale price with the seller or potentially cancel the home sale.

How Licensed Appraisers Determine Value

After you are under contract to purchase a home and during the closing process, a lender will likely order a home appraisal to confirm the value of the property. A professional appraiser will prepare a report that estimates the home’s current value, which can impact how much a lender might be willing to loan you.

Some factors that impact home appraisal costs include:

• Square footage: Homes with a larger footprint typically see high values.
• The home’s age: Newer homes might receive a higher valuation than older ones.
• Location: Homes in high-demand areas might see higher valuations than others.
• Home improvements: Home renovations and remodels with recent upgrades could increase the appraised value of the home.

Is Market Value or Appraised Value More Important?

Both the market value and appraised value are important, but which one is more important varies based on the situation. In most transactions, the market value carries more weight because it indicates what buyers might be willing to pay for the property at the time. With that, most sellers will look at market value when negotiating a deal.

However, during the financing process, the appraised value takes center stage, especially if the market value is significantly higher than the appraised value. A lower appraised value could throw a wrench in a potential deal, since most lenders use this valuation in determining the size of the potential loan.

Appraised vs. Market Value FAQs

Still have questions about the appraised value vs market value? We have answers.

Why Would a Home's Appraised Value Be Lower Than Its Asking Price?

A mismatch between a home’s appraised value and market value is a relatively common scenario. In a hot housing market with rising prices and stiff competition, a home’s appraised value might be lower than its asking price. Additionally, missing information could pull a home’s appraised value down.

How Do Interest Rates Affect Appraised and Market Valuations?

Interest rates typically don’t have a direct impact on home valuations. But when interest rates drop, demand for home purchasing may surge, which might push market valuations higher faster than appraised valuations.

How Do You Know What Your Home Is Worth?

Consider looking at Automated Valuation Models (AVMs) as a starting point. Beyond that, look at real estate comps, which can help you get an idea of what similar homes are selling for in your area. You can also hire a real estate agent to perform a comparative marketing analysis for a potentially more accurate value.

Final Thoughts: Understanding Appraised Value vs. Market Value

When buying, selling, or refinancing a home, understanding the difference between the appraised value and market value can help you make more confident decisions. After all, the market value reflects what buyers might be willing to pay, but an appraised value reflects a more professional and objective estimate that lenders rely on.

If you are getting ready to buy or refinance, consider get prequalified for a mortgage today.