How Is a Home Equity Loan Amount Calculated?
One of the best parts about owning a home is that, generally speaking, it is an appreciating asset. This is true of both turnkey properties and fixer-uppers alike. Another great part of home ownership is that as you continue to pay off your mortgage loans, you build equity and actually own an increasing percentage of your house. Plus, if you do end up improving your home—either through renovation or just diligent maintenance—you are likely increasing your equity by adding value as well. Building your equity in a home is inherently beneficial, but it also opens the door to more possibilities, too—in particular, the possibility of home equity loans.
A home equity loan allows you to borrow funding using your home’s value as collateral. It can be a great source of additional funding for things like:
- Home renovations
- College education
- Debt consolidation
Essentially, the loan amount is determined in part by the property value and the amount you still owe on your mortgage. This is often referred to as the loan-to-value ratio (LTV). We explain the details below!
How Do You Calculate Loan-to-Value Ratio?
To calculate the LTV of your home, simply divide your remaining mortgage by the current appraised value of your home. To do this, you will need to:
- Know how much of your mortgage you still owe, and
- Have an appraiser determine the current value of your property
Once you have taken care of both of those tasks, you can calculate LTV. Let’s walk through an example. Suppose your current remaining mortgage amount is $175,000 and your home’s value is $250,000. Your LTV calculation would be:
$175,000 / $250,000 = .70
If you convert that to a percentage, your loan-to-value ratio is 70%. Typically speaking, to secure funds from a reputable lender (like Indiana Members Credit Union) you will need a LTV of 80% or less.
How Much Would a $100,000 Home Equity Loan Cost Per Month?
Unfortunately, there is no blanket answer since home equity loan rates change frequently. Sticking with the same example from above, suppose you only wanted to borrow $100,000 in the form of a home equity loan. You probably want to know how much that would end up costing you as a monthly payment. If you were able to secure one of the best home equity loan rates through a company like IMCU, you could expect to have an affordable and below industry average monthly payment.
It is worth noting, however, that there are several factors that impact your monthly home equity loan payment including:
- Loan amount
- Loan term (length of the loan)
- Interest rate
- Number of pre-existing loans
- Credit score
Can You Borrow Money Anytime with a Home Equity Loan?
While home equity loans are pretty straightforward, there are a few restrictions to how and when you can borrow funding. For starters, most lenders require that your LTV be 80% or below. In other words, they are looking for homeowners that have at least 20% equity in their property. Additionally, most lenders require borrowers to have a credit score of at least 620. Other considerations include whether you have an existing home equity loan against your property already. In addition to LTV, lenders usually assess your debt-to-income (DTI) ratio. Your DTI is a summary of your:
- Monthly liabilities, like housing and utility bills, credit card payments, loan payments and other debts
- Divided by your gross monthly income
The lower your DTI is, the less risky you will appear to lenders.
Is Home Equity Really Worth It?
If you're considering a home equity loan, you are likely asking whether it’s really worth it. The fact of the matter is that it certainly can be, but it depends on your specific circumstances. Home equity loans can be used to fund your (or your family’s) college education. You could then use that money to renovate or add on to your home. Maybe you’re in the market for an RV or a boat—home equity loans can help with that, too. The possibilities are almost endless when it comes to what a home equity loan can do for you.
The real question is whether or not you can find a rate that makes sense for you and a company that treats you like a partner, not a number. That’s where Indiana Members Credit Union comes in.With over 60 years of experience, we have been providing top tier service and rates to members for generations. At IMCU, we care about our members and our community, meaning we want to help you achieve your goals. Whether you have questions about home equity loans, or are just looking to get started, we are here to help. Contact us today to learn more!