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Using your home's equity to finance home improvements, large expenses or an education can be one of the best ways to get the extra funds you need. Before you decide on a home equity line of credit or a home equity loan to access your funds, you should estimate how much equity you actually have available to borrow.
Determining equity is simple. Take your home's value, and then subtract all amounts that are owed on that property. The difference is the amount of equity you have.
For example, if you have a property worth $400,000, and the total mortgage balances owed on the property are $200,000, then you have a total of $200,000 in equity.
A home's market value can fluctuate depending on the economy and other factors. In a strong economy, home values typically climb. You can find home value estimates online by accessing sites like Zillow.com or other sites. These estimates are not an appraisal that any bank will rely on. When you apply for a home equity loan or line of credit, an appraisal of the value of your home's worth will be done. The appraisal will examine the size of your home, number of bedrooms and bathrooms, property location, surrounding area and other factors to determine your home's current market value. This process may be done using a valuation model or be done by an independent home appraiser. There may be fees involved with getting your home appraised with some lenders.
Once you've determined the full amount of your equity, you may or may not be able to borrow the full amount. The loan to value (LTV) ratio dictates how much a lender is willing to lend. Many banks and financial institutions use an LTV of 80%, which means they won't let you carry debt that is more than 80% of your home's value. This debt includes your current mortgage as well as the new loan or line of credit.
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 $120,000 of that equity in a loan or line of credit because that would bring your total debt to $320,000 which is 80% of your home's value.
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 vs. a home equity line of credit. Or you can first learn more about the common ways to use your equity.
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