Ever wonder how much home equity you can qualify to borrow from your home? Let’s solve that mystery right here and now. And then – armed with that information – you can ask a Monroe Bank & Trust mortgage expert for the specific details of your particular loan.
It All Starts With the Property Value of Your Home
As is the case with all real estate loans, borrowing for either a home equity loan or a home equity line of credit (HELOC) starts with the property value of your home. And naturally, the higher the value, the more borrowing power you will have.
The value of your home is determined by a real estate appraisal, which is provided by a licensed appraiser, or an automated valuation model(AVM), which is a service that uses mathematical modeling combined with a database. The appraiser or AVM will determine the market value of your property, by comparing it to similar properties that have sold in your area within the past several months.
The emphasis here is on similar properties. That means that the appraiser won’t be using either the highest or the lowest priced sales in your market area, but rather the sales of properties that are determined to be most like yours.
For example, if your house has three bedrooms, two bathrooms, and covers 2,000 square feet, the appraiser will use similarly sized properties. By contrast, a home with five bedrooms, three bathrooms, and 3,500 square feet is generally not deemed to be a comparable property. At the same time, neither is a two bedroom, one bathroom house, with 1,000 square feet.
The appraiser will select those properties that he or she deems to be most similar to yours. Adjustments will be made for specific square footage, room count, lot size, and various amenities, such as a pool, a deck, or an enclosed porch.
The end result will be the value at which your property is likely to sell, if it were put on the market today – also known as the <em>fair market value.</em>. That is the value that most banks and other equity lenders will use for lending purposes.
Calculating Your Loan-to-Value (LTV)
Once the property value has been determined by the appraiser, the bank will calculate the acceptable loan amount based on the loan-to-value, or LTV. For example, if the bank is willing to lend up to 80% of the value of the property, then you can borrow as much as $240,000 of your equity from your home that has a fair market value of $300,000.
It’s important to understand that different banks have different LTV requirements. Some banks may restrict the maximum LTV to no more than 70% or 75% of the appraised value. Others, such as Monroe Bank & Trust, may go as high as 85%.
Which bank you choose to work with may depend upon their flexibility with LTV. For example, if you need to borrow $240,000 against your $300,000 property, but one bank as an LTV limit of 75%, the maximum they will lend will be $225,000. A bank that will lend up to 80% of the value will get you the $240,000 loan limit that you will be looking for.
Calculating Your Combined LTV
When it comes to home equity loans and HELOC’s, LTV is only the first part of the calculation. Since most homeowners who are looking for either type of loan usually have an existing first mortgage on the property, a second calculation has to be determined.
If a bank will allow an 80% equity loan on your home, and the property is determined to be worth $300,000, your total equity eligibility will be $240,000.
But if you already owe $180,000 on your existing first mortgage, this will reduce the amount of equity that the bank will allow you to borrow.
The $180,000 existing first mortgage will be deducted from $240,000. That means that the net amount of your equity loan or HELOC will be limited to $60,000.
This is often referred to as a combined LTV, or CLTV. In the example above, your primary LTV based on your existing first mortgage is 60% ($180,000 divided by $300,000). But when the existing first mortgage and the new equity loan or HELOC is added to the total indebtedness, the CLTV is 80%.
Ask Monroe’s Mortgage Experts How Much Equity You Qualify to Borrow
When you apply for an equity loan or home equity line of credit, your Monroe Bank & Trust mortgage expert will calculate the exact amount of the loan you are able to borrow out of your home. But this is useful information to have before you begin the process, that way you have a general understanding going into the application.
You can then choose either a home equity loan, or a Home Equity Line of Credit.
A home equity loan offers a fixed rate, with a fixed monthly payment, with both short-term and long-term rates.
A Home Equity Line of Credit works like a credit card secured by your home. It comes with extremely affordable financing options. Some loans offer interest-only payments. Monroe Bank & Trust’s Home Equity Lines of Credit do not require a processing fee, application fee or an annual fee. And you can access your credit line at any time using a debit card.
Either loan type enables you to borrow out up to 85% of the appraised value of your property. The proceeds can be used for just about anything you want – home improvement, debt consolidation, new furniture, or even the purchase of a car or a boat.
Let’s Get Started
Speak with Monroe Bank & Trust mortgage expert today, and start putting the equity in your home to work for you!