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Monday 11/20/2017 Mortgage Rates

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How to Find Your Home Equity

What Determines Home Equity

Home equity is not the same as home value. Equity is the difference between your home's appraised value and the remaining outstanding mortgage loan you owe. The home's appraised value and the outstanding balance on your mortgage are both inversely proportional; the more your home's appraised value is, the less you owe on your mortgage, and the more home equity you have. Before any refinancing commences, you need to be clear on your home equity.

The Loan-To-Value Ratio

Refinancing of any kind will hinge on the level of risk associated with your home from your lender's perspective. The lender does this by calculating your property's loan-to-value ratio (LTV), which typically shouldn't exceed 80%. If it exceeds 80% then your deal will be considered too risky and you will be looking at higher interest rates or private mortgage insurance (PMI). Paying for private mortgage insurance protects the lender in the case of a default. To avoid higher interest rates and paying for mortgage insurance, try lowering your LTV. This will make you more eligible for the best mortgage deals.

To get a professional appraisal of your home, a certified appraiser hired by the lender should pay you a home visit. If you insist on a professional appraiser but the lender won't provide you with one, you can always hire your own. 

Using LTV to Find Your Equity

Calculating your home's LTV is done by dividing the current loan amount by your appraised home value. If the deal involves more than two parties, then the appraised home value would be replaced with the value of the "collateral". You can find a simple guide to using LTV in our table. If you're refinancing, this is taken into account in terms of a current mortgage.

How to Calculate Your Home Equity Using LTV
What You Need How-To Example
 The Market Value of Your Home  Most lenders will loan 80% of a home's market value. If you already know your home's value then just multiply it by 80% (0.8) to find the loan. The other 20% is your down payment.  Your home's market value is $160,000; 80% of 160,000 is $128,000.
 The Outstanding Balance of Your Mortgage  You can contact your lender to obtain the outstanding balance.  $60,000 is the outstanding balance of your mortgage.
 Is There Any Debt Against Your Home?  If so, have it ready.  None.
 Estimate Your Home Equity  Now all you need to do is add the outstanding balance of your mortgage with the outstanding balance of your debt. Finally, subtract the total of the two from 80% of your home's market value. That is your home equity.  $68,000 is your home equity.

 

Suppose you requested a loan of $128,000 and the value of your home was $160,000, the equation then works out to be: 128,000 ÷ 160,000 = 0.8. Converted to a percentage (multiplied by 100) you get 80%, which is within the acceptable refinancing loan threshold. The leftover 20% is your down payment as well as the lender's "haircut" - which is the amount that they're guaranteed in the case of a default or insolvency. The larger your down payment is the lower the interest rates to which you're obligated. Simply making your monthly payments will lower your current loan-to-value ratio but you can accelerate this process by making those larger installments if you're contractually permitted to do so. You can be penalized for prepayments that alter the loan's closing date. Double-check with your lawyer. 

Apart from decreasing the loan balance, you can increase your home's appraisal value to lower the loan-to-value ratio. Home remodeling of any kind does this. Kitchen and bathroom remodeling in particular substantially increase the asking price of your home and, in turn, lower your LTV by raising your home equity. 

The Benefits of Building Home Equity

  • Money in your pocket.
    You can tap into your home equity whenever you need to convert it into hard cash, as is the case with home-equity loans and home equity lines of credit (HELOC).
  • Increases your home's value.
    As your home equity steadily rises with years of paid off mortgage debt behind you, you can renovate and remodel to boost the market value of your home. Kitchen and bathroom remodeling are sure-fires when it comes to recouping your investment.
  • See your money return.
    Window replacements can recoup 72.1% of the money you spent on them. For more items of renovations and their recouping value, refer to the table below.
Current Year's Upscale National Averages
Project Cost ($) Resale Value ($) Cost Recouped (%)
 Bathroom Remodel 57,411 32,998 57.5
 Garage Door Replacement 3,140 2,830 90.1
 Major Kitchen Remodel 119,909 73,707 61.5
 Adding a Master Suite 245,474 140,448 57.2
 Vinyl Replacement Windows 14,725 10,794 73.3
 Wood Replacement Windows 18,087 13,050 72.1

 

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