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