Why is a real estate appraisal significant in obtaining a mortgage?

A real estate appraisal is crucial in the mortgage process primarily because it ensures that the property's value aligns with the loan amount requested by the borrower. The lender requires an appraisal to establish the fair market value of the home, which serves as the collateral for the mortgage. If a property's appraised value is lower than the loan amount, it poses a risk to the lender, as they may not recoup their investment in the event of default.

The mortgage lender wants to protect their investment, and an appraisal provides assurance that the borrower is not overextending themselves based on an inflated property value. This alignment between the appraised value and the loan amount safeguards both the borrower and lender, ensuring the financial integrity of the mortgage agreement.

While other choices mention related concepts, they do not address the primary purpose of an appraisal in the mortgage process. For instance, reducing tax liability and determining insurance costs are not direct functions of an appraisal. Although historical pricing data may be useful for various reasons, it does not serve the fundamental purpose of facilitating a secure and appropriate loan based on current property values.