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. Also, you can 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 takes into consideration the value of your home as well as 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. So, 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 the value of your home.
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, the value of your home. 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.
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 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 have an idea of 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 have consulted with a lender, you’ll have a better picture of whether or not 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.