How to Calculate Home Equity for Your Home
With interest rates at a historic low, you may be considering a refinance on your home or a new home equity line of credit. Both loans allow you to use your home as collateral for cash. If you have equity in your home, you can apply for a line of credit. You may also consider a home refinance with Rivermark Community Credit Union to pay off your existing home mortgage and perhaps even free up some surplus cash.
But in order to know the loan amount you’ll qualify for, you’ll first need to know the amount of equity you have in your home. Not sure how to calculate home equity? Not to worry. We’ll walk you through the steps of figuring out the amount of collateral available in your home.
Determine Your Home’s Value
The first thing you need to do is determine how much your home is worth. This can be done in a few different ways. You probably remember that when you originally purchased your house, an appraisal was done to determine the property value. Just as with your home mortgage, an appraisal is often done when you’re applying for a refinance or home equity line of credit. This helps the lender understand how much you’re qualified to borrow and helps you understand how your home is valued.
Perhaps you’re not ready to begin the refinancing process just yet and simply want to know how to calculate your home equity on your own. If you still have a good relationship with the real estate agent who sold you your home, you should try contacting him or her for a comparative market analysis. This will allow you to view the listing price of comparable homes in your area, which should help you gauge the value of your own home.
While you want to try to get as accurate an estimate as possible, you can also try to determine your home value without the help of a professional. There are a number of online tools and calculators that will help you come up with a rough estimate.
For instance, try using the Federal Housing Finance Agency HPI calculator. This calculator doesn’t take into account current market conditions, however, it will project home value based on average appreciation rates of other homes in your area. This is a good place to start to get a general sense of how much your home is worth. Once you have an idea of the value of your home, you’re ready for the next step.
Deduct the Amount You Owe
If you own your home outright, congratulations. You can move to the next step. However, if you’re like most people, then you’re probably still making mortgage payments. You may even have a second mortgage, such as a home equity line of credit. If that’s you, you’ll need to calculate any outstanding debts for which your home has been used as collateral.
Now’s a good time to log into your account and pull up your most recent mortgage statement. This will show you your outstanding balance. If you have any other home loans, pull up the most recent statements for those as well. Next, add up all your outstanding balances. Now, deduct your outstanding debt from the figure you came up with when determining your home’s value. This is how much equity you have in your home.
For instance, let’s say your home is valued at $250,000. You have a first mortgage with an outstanding balance of $117,000 and no other loans that you’ve taken out on your home. When you deduct the amount you owe from your home’s value, you’re left with $133,000. That’s the amount of your home that you own outright.
It’s also important to note that it’s possible to have negative equity in your home. For instance, if your home has depreciated in value since you originally bought it, you could possibly owe more on your home now than what it’s currently worth.
Calculate Your Loan to Value Ratio
If you’re considering a refinance or second mortgage, you should also calculate your loan-to-value ratio, also known as LTV. For example, you may have heard of a debt-to-income ratio. LTV is very similar. This is the percentage of debt you have on your home compared to your home’s overall value.
For instance, let’s stick with the example we used above. You owe $117,000 on your home valued at $250,000. To figure out your LTV, you divide the amount you owe by your home value. Then multiply that number by 100. When we divide $117,000 by $250,000, we get 0.468. Now we multiply that by 100 to get 46.8 percent, which rounded up is 47 percent. This is our LTV.
If you’re going to refinance your home, you should aim to keep your LTV at or below 80 percent. If it goes any higher than that, you’re considered a higher risk loan, and you’ll have to pay private mortgage insurance, also known as PMI, until you bring your LTV to 80 percent or less. However, PMI only applies to first liens, so if you’re taking out a second mortgage, you generally don’t need to worry about it. Keep in mind, though, that many lenders require the combined LTV for both loans to be at or below 85 percent.
If a refinance or home equity line of credit is something you’re considering, Rivermark has some great calculators to help you make your decision. You can see if you’ll save money by consolidating your debt or lowering your interest rate.
We understand that these are challenging financial times for many. But Rivermark is here to help. Give us a call today so we can find ways for you to strengthen your finances for tomorrow.