Your home equity – the amount of your home you totally own – can be a valuable resource. With equity you can renovate several rooms, pay off your credit card, cover college tuition, start your own business, or do almost anything.
However, before exploring how to use this source of wealth, you need to know how much you have. This figure, along with the loan to value (LTV) ratio, determines the likelihood of approval for a Home Equity Loan or Home Equity Credit Line (HELOC) and how much you can qualify.
Here’s how to calculate fairness in your home and how much you can tap. And how much control is possible and not possible in the interests of your ownership?
Important Terms to Know When Calculating Equity
Calculating home equity is relatively simple mathematics, and if you have accurate numbers on hand, simply plug it into your home equity calculator. You can determine your own level of fairness. This is the way.
How to calculate fairness of your home
Step 1: Estimate the value of your home
Equity calculations begin by identifying the market value of the property. You can know if your home is worth using many ways.
Online Home Price Estimator is an easy (and free) way to measure the value of your home. These popular online tools rely on algorithms and published information to generate estimates. However, please note that the results are actually estimates and are not necessarily the value that lenders will value if they decide to apply for funding.
When you enter your address into the online estimator, the amount of dollars you earn is an estimate of the fair market value of the property, which may not be the same as the value of the home. Home Equity lenders will depend on the value of the home value based on the valuation of a professional evaluator to determine the stock level and whether you can borrow. The fair market value of your home simply refers to what a home buyer is likely to pay for today’s property.
However, if you still don’t want to pay hundreds of dollars for a professional valuation, using a home price estimator is a good first step to calculating the value and fairness of your home.
Step 2: Find what you owe
The next required number is your outstanding balance on your mortgage. This is stated in the latest statement. You can also assume that you have an online dashboard for your lender or servicer, or call this information directly.
Step 3: Take the difference and determine fairness
Once you have the value of your home and your mortgage balance, it’s almost over. From here, all you need to know how to calculate equity is simply subtraction. Your home equity deducts the current value of your home from your current mortgage obligations.
Assume your home is currently worth $410,000 and you have a balance of $220,000 left on your mortgage. Subtract your outstanding balance of $220,000 from the value of $410,000. Your calculations would be:
In this case, your home equity will be $190,000. This is a 46% stake.
How much fairness can I borrow?
Ok, you now know how to determine the fairness of your home. However, the number that arrives is not equal to the sum that can be withdrawn. That’s because you can’t rent the full amount of fairness in your home. Many lenders can only rent up to 80% of your home’s value.
Computing access to equity is fairly easy. Using the example above, it’s 0.8 x $410,000, or $328,000. If you cut down $220,000 (what you still owe on your mortgage), you’ll have $108,000 of tapable equity.
So, to get a rough sense of the amount that can be borrowed using the example above, the entire calculation would look like this:
Please note: Home Equity Loan and Helock are not free. These loans come with some closure costs, just like taking out a traditional mortgage. These costs include loan origination, valuation, credit reporting, and title search fees.
Calculation of LTV and CLTV Ratios
Now that you know how to calculate the amount of home equity you have, you can explore borrowing for it. However, when you approach lenders about this option, they won’t just look at your stock interests.
Specifically, lenders will also see splitting your LTV ratio, or your loan size by the percentage divided by the value of your home. You can do math with Bankrate’s LTV calculator. Or use this equation (using the same number from the example above):
So far, so good. Unfortunately, there’s no stopping from there with loans and credit lines supported by Home Equity. For this type of fundraising, lenders will match LTV (CLTV) ratios as well as LTV.
For example, if you need a $30,000 home equity loan, your CLTV would be 60.97%.
The higher the LTV ratio, the higher the risk to the lender. And the higher the interest rate they are likely to charge you.
In other words, knowing how to determine the fairness of a home is not enough to determine how much money you can borrow. I would also like to watch the CLTV I have from my original mortgage and new loan.
How to access your home equity
Once you know how to calculate fairness and how much you will borrow, you need to choose a loan type. Options include:
- Home Equity Loan: With a home equity loan, you can pay the lump sum amount upfront and repay it in comparable installments at a fixed rate. Ideal if you know how much you need and prefer predictable monthly payments and stable interest rates.
- Home Equity Credit Line: HELOC is more flexible. Once approved, you can rent up to the limits set during the draw period, which usually lasts 10 years. Just like with credit cards, you can borrow only what you need when you need it. And you only borrow interest charged at various rates for what you actually withdraw. Once the draw period has ended, you will repay what you borrowed and outstanding interest. Essentially, your credit line is converted into a loan that can be repaid for a set period, usually up to 20 years.
- Cash Out Refinance: Refinancing cash out will replace your existing mortgage with a new larger mortgage. The difference between the two balances is given to you with a suspended payment that can be used for any purpose. From an interest rate perspective, cash-out refinances are usually cheaper than other products that offer faster cash, such as personal loans and credit cards. Its interest rates also tend to run at points a few percent lower than Heoans and Heloc. That said, it could mean trading lower mortgage rates on existing loans with higher loans on new loans, which will cost much more over time.
How home prices affect the fairness of your home
You can control one of your home equity calculations: mortgage balances. Make monthly payments and your balance will decrease and your fairness will increase.
However, another big piece of the puzzle when calculating equity doesn’t make it very clear to your hands. It is related to the real estate scene in your local home. When the price of your local home increases or falls, it directly affects your home’s fairness.
Let’s go back to the example above. Let’s say you paid $410,000 for the house when you bought it, but its fair market value increased to $440,000. That’s another $30,000 in your home equity stake. The value of the home increases on the ledger side, not the home, not the lender. This is because closing your home will set up a mortgage balance. Of course, it will decrease as you pay, but the size of your debt will not fluctuate with changes in property value.
However, the opposite may occur. If the selling price drops in your neighborhood and the value of your home drops to $390,000, it will bring you $20,000 less stock.
Fortunately, changing local housing markets is not the only way to move needles to the value of your home. You can do strategic renovations to make your home more valuable.
Please note that returns on investment are not guaranteed. You’ve invested $15,000 in improvements, but a decline in the local real estate market means you cut your home by $20,000, for example, cancel your stock profits.
