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Chelsea State Bank

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How Much Equity Do You Need for a Home Equity Loan?

November 11, 2020

home equityWhen looking to remodel your home, consolidate debt, pay off student loans, buy an RV, pay taxes, or just have money for an emergency – a home equity loan is an ideal way to borrow money for these dreams and emergencies. The ways in which you can use a home equity loan are almost endless. So the first question you’ll want to ask your lender is – how much equity do I need in my home to apply for a home equity loan? That answer is simple – usually 20%. But let’s dig a little deeper.

Most lenders will require that you have at least 20% percent equity in your home. They will also want to know the current appraised value of your home. And to make sure you can comfortably pay back your mortgage and home equity loan, they will also want to figure your loan-to-value ratio.

Determine Your Home Equity

The way to determine how much equity you have in your home is to subtract the total amount you owe on your home from its current appraised value. For example, if you owe $150,000 on the mortgage of your home, and you’re thinking the most current appraised value is at $250,000. Your home equity is $100,000.

Current appraised value      $250,000
What you owe                       -$150,000
Your home equity                  $100,000

Appraised Value

There are several ways to determine your home’s value and of course the most accurate way is to have a professional appraisal. In the meantime, you can find estimates of your home’s value on Zillow.com and other similar sites. You can also get a feel for your home’s worth by seeing what the market is doing in your neighborhood. When the economy is strong, you will typically see home values start to increase. When you actually apply for your home equity loan, your lender will usually have an independent appraiser determine the true value of your home. In some cases the State Equalized Value (SEV) may be used to determine the value.  You can find this on your current tax bill for the property.  The lender will usually multiply the SEV times two for an estimated value.

Loan-to-Value Ratio

However, this is where you need to make a few more calculations to determine how much you can actually borrow on your home’s equity. Again, your lender will help you determine all of this very quickly.  Typically your lender will look at your loan-to-value ratio to determine how much of your home’s equity they feel secure in lending you. Most lenders will use a loan-to-value ratio of 80%. This means that you cannot hold debt that is more than 80% of your home’s current appraised value. Your lender will want to include your current mortgage as well as your new home equity loan in your new debt load.

Let’s see where we stand with our current example above. You have $100,000 in equity in your home and your lender will determine your 80% loan-to-value ratio. This means you are able to borrow up to $50,000 of your home’s equity.

Current appraised value                  $250,000
loan-to-value ratio                               x 80%
 
80% of home’s value                       $200,000
Minus my current mortgage          –$150,000
Estimated home equity loan           $50,000

So, if I owe $150,000 on my mortgage and adding $50,000 to this amount will bring my total debt to $200,000 which is the 80% of the home’s value.

Now you can safely assume that your lender will authorize you to borrow up to $50,000 in a home equity loan because you have at least 20% equity in your home and you meet the estimated loan-to-value ratio. Of course you can always borrow well below the amount you are allowed!

Home Equity Loan vs Home Equity Line of Credit

One final thing your lender will discuss with you are your home equity loan options. You will usually have the option to apply for a home equity loan or a home equity line of credit (HELOC).  A home equity loan is a single disbursement that requires a fixed payment and will usually have a fixed rate. A home equity line of credit, or HELOC, will usually have an adjustable rate because you can borrower the money anytime in the draw period.

As a homeowner – with at least 20% equity in your home – the ways in which you can use a home equity loan are almost endless. Whether you decide to use a fixed home equity loan or a home equity line of credit, having this type of loan allows you to plan for home improvements, debt consolidation, education, and all those other home and life dreams…and the emergencies that come up when you least expect them, too.

For more information on a home equity loan please call Chelsea State Bank at 734.475.4210 or visit us at HERE to begin. We are here to help you learn more about this loan and any of the other loans we offer to help make life a little easier.

Start a Home Equity Line of Credit with Chelsea State Bank

Examples are for informational purposes only and do not constitute an offer. Loans are subject to credit review and approval.

Related posts:

  • What’s the Difference: Home Equity Loan vs. Line of Credit
  • Home Equity Loan vs. Home Equity Line of Credit: Which is Better?
  • Can I Get a Home Equity Loan with Bad Credit?
  • HELOC vs Personal Loan: Which is Right For You?
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Next Post: HELOC vs Personal Loan: Which is Right For You? »

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Related Posts

  1. What’s the Difference: Home Equity Loan vs. Line of Credit
  2. Home Equity Loan vs. Home Equity Line of Credit: Which is Better?
  3. Can I Get a Home Equity Loan with Bad Credit?
  4. HELOC vs Personal Loan: Which is Right For You?

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Free Kasasa Cash Checking Benefits

The average interest rate earned on most checking accounts is not even 1%! And many banks charge you just to keep your account open. A Free Kasasa Cash Checking account through Chelsea State Bank is not only free to use and keep open, but it offers some of the highest annual APY1 of any account. There’s no minimum balance, no fees, and you have access to online banking services, as well as personal service from Chelsea State Bank.

  • Earn 2.53% APY1 annually on balances up to and including $10,000*
  • Earn .25% APY1 on balances over $10,000*
  • Earn .05% APY1 if qualifications are not met*
  • No maintenance fees
  • Full-service online banking
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  • Refunds on ATM withdrawal fees up to $25*
  • $1.00 minimum deposit to open. No minimum balance requirements.

*To earn your rewards, enrollments must be in place and all of the following transactions and activities must post and settle to your Kasasa Cash Back account during each Monthly Qualification Cycle:

  • At least 12 debit card purchases
  • Be enrolled in and agree to receive e-statements
  • Be enrolled in and log into online banking.

1 APY = Annual Percentage Yield. Rate is variable and may change at any time. Fees may reduce the earnings on this account. APY is accurate as of 04/01/2020.

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Free Kasasa Cash Back Checking Benefits

Most cash back rewards cards sound great at first, until you read the fine print: You only get rewards on certain items, at certain stores, at certain times. With a Free Kasasa Cash Back Checking account, you get 4% cash back on all purchases up to $200 monthly. That’s $96 cash back every year. And you still have access to top-notch online banking services, one-on-one service through Chelsea State Bank, no maintenance fees, and refunds on ATM withdrawal fees*.

  • Earn 4% cash back on all purchases up to $200*
  • No maintenance fees
  • Full-service online banking
  • Personal service with Chelsea State Bank
  • Refunds on ATM withdrawal fees up to $25*
  • $1.00 minimum deposit to open. No minimum balance requirements.

*To earn your rewards, enrollments must be in place and all of the following transactions and activities must post and settle to your Kasasa Cash Back account during each Monthly Qualification Cycle:

  • At least 12 debit card purchases
  • Be enrolled in and agree to receive e-statements
  • Be enrolled in and log into online banking

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Online shopping and services allow you to get what you need when you need it. But did you know that you can earn separate rewards on your online purchases? With a Kasasa Tunes account, you can earn $10 in rewards every month straight back to your iTunes®, Amazon®, or Google Play™ accounts. The best part is, you can make purchases anywhere and get rewards back to your online accounts!

  • Earn $10 monthly to your iTunes®, Amazon®, or Google Play™ accounts
  • No maintenance fees
  • Full-service online banking
  • Personal service with Chelsea State Bank
  • Refunds on ATM withdrawal fees up to $25
  • $1.00 minimum deposit to open. No minimum balance requirements.

To earn your rewards, enrollments must be in place and all of the following transactions and activities must post and settle to your Kasasa Tunes account during each Monthly Qualification Cycle:

  • At least 12 debit card purchases
  • Be enrolled in and agree to receive e-statements
  • Be enrolled in and log into online banking

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