Understanding Home Equity Loans
Home equity loans are loans that use your home as collateral. Banks and other lenders use your home’s value to determine how much they can lend you. You must have sufficient equity in your home to qualify for a home equity loan. Equity is the difference between the value of your home and what you owe on your mortgage. Home equity loans are commonly used to finance home maintenance, repairs, and improvements, as well as debt consolidation.How Much Can You Borrow with a Home Equity Loan?
The amount you can borrow with a home equity loan depends on your home’s value and the amount of equity you have in your home. Most lenders allow homeowners to borrow between 80 and 85 percent of their home’s value less what they owe on their mortgage. For example, if your home is worth $300,000 and you owe $200,000 on your mortgage, you may be able to borrow up to $50,000 (85% of $300,000 is $255,000 – $200,000 = $55,000, but most lenders require you to keep a certain amount of equity in your home, leaving you with $50,000).Calculating the Maximum Amount You Can Get
To calculate the maximum amount you can get with a home equity loan, you need to know your home’s value and your outstanding mortgage balance. You can subtract your outstanding mortgage balance from the lender’s maximum loan-to-value ratio (LTV), then multiply that figure by your home’s value. For example, if your home is worth $300,000 and your outstanding mortgage balance is $200,000, your LTV is 67% (200,000 ÷ 300,000 = 0.67). Assuming your lender’s LTV is 85%, you will be able to borrow up to $70,000 ($255,000 x 0.85 = $216,750 – $200,000 = $16,750, plus $50,000).Loan-to-Value Ratio (LTV) Calculation:
- Divide your mortgage balance by your home’s appraised value
- Multiply the result by 100 to get a percentage