Home equity is based on the value of your home
Using the available equity in your home is a great way to finance home improvements, large expenses and education costs. However, before deciding on a home equity line of credit or a home equity loan you should estimate how much equity you have available to borrow in your home.
To determine the equity in your home, take your home's value and subtract all amounts that are owed on that property. The difference would be the amount of equity you have in your home.
For example, if you have a home is worth $300,000 and the total mortgage balances owed on the property are $100,000 then your potential available home equity is $200,000.
Read more to find out how to determine your home’s value and how much of the equity in your home you can utilize.
Finding the value of your home
A frequently used method that financial institutions deploy to determine a value is the home’s tax assessed value. This is the first step when determining the amount of equity you have available to borrow for a home equity loan or line of credit. Most cities towns have this information available to view online so obtaining this amount is a great start in determining your home value. Other methods that may also be used are on-line appraisals and drive by appraisals. Keep in mind there are circumstances that may require a full appraisal performed by an independent home appraiser which involves a visit your home to assess the value and provide an appraisal report to the bank. In many cases, the appraisal is required when the amount of the home equity loan or line of credit requested is substantial or if there is a disagreement in the tax assessed value. Banks may charge a fee for a professional home appraisal.
Loan to value ratio
Once you’ve determined the value of your home, the final step is to apply the loan to value (LTV) ratio. Banks use a LTV ratio to determine how much of the available equity they are willing to lend to you. The most common ratio used by many banks and financial institutions is an LTV of 80%, meaning they won’t loan out more than 80% of your home’s value. This debt includes any current mortgage balance as well as the amount of the new loan or line of credit being applied for.
Using the same example above, if you have $200,000 in equity and your bank uses an 80% LTV, you would be able to borrow $140,000 of that equity in a loan or line of credit because that would bring your total debt to $240,000 which is 80% of your home’s value.
Although 80% LTV is the most common ratio some banks may prefer to use a lower ratio of 70%. It’s best to be prepared with both figures in mind to unsure that you chose the product that is right for you.
Once you’ve determined your available equity, you can decide which home equity option is right for you. Learn the difference between a home equity loan and a home equity line of credit. Contact us today to discuss your options or apply online.