A home equity loan or line of credit can be beneficial in many situations. Do you want to remodel a kitchen or a bathroom in your house? Has anything happened that resulted in an unexpected expense? Whatever the case, before contacting a lender to try to get a loan or line of credit, you might want to calculate how much equity you have in your home.
Calculating the equity in your home is relatively straightforward once you understand how the equations work. You will need to do two potential calculations. You can also use a mortgage calculator to help you with the math, or you can contact a mortgage professional to help you with the calculations.
Loan to Value Ratio
One of the most important calculations is your loan to value ratio or LTV. The LTV is another way of getting a picture of how much you owe on your home. It considers the value of your home and the amount you owe on your current mortgage.
Most mortgage companies require that you have an LTV of 80 percent or less. 80 percent LTV means that you must owe no more than 80% of the value of your home in your current mortgage. The LTV percentage will also affect how much of a home loan or equity line of credit you might be able to get.
Divide the current loan balance by the appraised value to calculate the loan to value ratio. You will get a decimal figure, which can be turned into a percentage. For example, if your current loan balance is $200,000 and your home is valued at $250,000, your LTV would be .80 or 80 percent.
Combined Loan to Value Ratio
Another percentage that lenders look at when determining if you qualify for a home equity line of credit or home loan is the combined loan to value ratio. This number determines how much of a loan you might be able to get based on your equity. The CLTV is calculated by adding your current mortgage loan balance to your proposed equity loan amount and dividing it by your home’s value.
Continuing with the previous example, let’s assume you want to borrow an additional $20,000. You would add $20,000 to the current loan balance of $200,000, then divide that number by $250,000, your home’s value. So in this example, your CLTV would be .88 or 88 percent. You can use a free mortgage calculator to aid in your calculations.
Check with a mortgage professional to find out their CLTV requirements to obtain a loan.
How do I calculate 20% equity in my home?
It is really simple to calculate 20% equity in your home. Contact your mortgage lender and request a loan balance. You can also log in to your home loan account online to get the most up-to-date loan balance. Subtract your home loan balance from the value of your home.
Divide the difference by your property’s value to determine home equity. If you think that your home is worth $500,000 and your loan balance is $400,000, you have $100,000 home equity. Divide this by $500,000 and you get 20 percent. Accordingly, you have 20 percent equity in your home.
How much equity do you need for a home equity loan?
Generally speaking, lenders want homeowners to have an 80 percent loan to value ratio. In other words, you need to own 20 percent or more of your home before you can qualify for a home equity loan.
Is interest on home equity loans tax deductible?
One of the best bonuses for taking on a home equity loan is a possible tax deduction. Interest on your home equity loan may be tax-deductible. The interest is tax-deductible on home equity loans as long as the borrowed funds go toward home improvements. Make sure to check the government-imposed limit when you file your taxes.
If you want to deduct interest on your home equity loan, the borrowed money can’t be used to pay off personal debt or any other non-qualified expenses.
Is home equity from a divorce taxable?
Normally, transfers of real estate between divorcing spouses are nontaxable. But there may be times when capital gains tax applies to transfers made as part of a divorce.
If you sell your home, you and your spouse can each exclude the first $250,000 of gain from your taxable income. This capital gains exclusion only applies to a “principal residence.” The principal residence is a home in which you’ve lived for at least two of the five years before the sale. Second homes or vacation homes don’t qualify as a principal residence.
What’s “capital gain”? The taxable gain is the selling price of your residence, minus the selling expenses, minus your adjusted “basis.” The amount it costs you to build your home or pay for your home is the basis, with some pluses and minuses for home improvements and tax benefits. Of course, with anything tax-related, you should seek the advice of a tax professional.
Is a home equity loan a good idea?
There are times when home equity loans are great. If you have a lot of home equity and some high-interest debt, a home equity loan might be a great debt consolidation option for you.
The biggest disadvantage of a home equity loan is that it is a secured loan. That means that you are using your home (risk losing your home) as collateral. You don’t have the same type of risk with a credit card, which is an unsecured loan. If you don’t pay your credit card, you won’t lose your house, but you could lose your home if you stop paying on a home loan.
Is home equity an asset?
Home equity is an asset, but it is not a liquid asset such as cash in a savings account. And just like any other asset, you can tap into home equity. A popular way to use home equity is to borrow against it. You can get cash to pay for remodeling projects, consolidate credit card debt, or pay for a college education.
The value of your house when you bought it and the current home value may be two very different amounts. Many factors can influence the value of the home. The amount of time passed since you have purchased the home, the current state of the economy, and the neighborhood are all important factors. A professional appraiser can help you estimate the value of your home.
The mortgage lender will likely require you to hire a specific appraisal company when you apply for the mortgage. However, if you want to know if you will qualify before applying, getting an independent appraiser to provide an estimate can be helpful.
Once you have successfully calculated the equity in your home using a mortgage loan calculator and consulted with a lender, you’ll have a better picture of whether you will be likely to qualify for a loan. Contact an expert mortgage professional to find out more about calculating the equity in your home or with any mortgage-related questions.
What is a home equity installment loan?
A home equity installment loan enables borrowers to tap into the value of their homes. With this type of loan, you can expect to borrow up to 85 percent of your home’s value. You will have a fixed monthly payment with a fixed interest rate, so no surprises.
A home equity installment loan is excellent for funding:
- Debt consolidation – paying off high-interest credit card debt.
- Home remodeling projects
- Funding education or paying down student loans
- Investing in new appliances
What happens to home equity in foreclosure?
In foreclosure, the home equity remains yours. Foreclosure is the legal proceeding that is the result of defaulting on a home loan. If you have not made the scheduled and required mortgage payments, the lender places your home loan in default and start foreclosure.
Homeowners who cannot sell the home or secure new financing can’t prevent the lender from selling the home from under them. The lender can sell the home you defaulted on for any amount they wish. Homes that don’t sell at auction can be sold through a real estate broker.
Home equity is what you own of your home’s value. If the property is sold and there is money left over after the loan, and all penalties and fees are paid, that’s equity, and that is yours to keep.