About Home Equity Loan
Many homeowners want to know information about their home equity and how to use it. What are the home equity loan products available for their major expenses?
Let us understand two types of home equity loans in Texas, and why would you need them.
What Is Home Equity Loans In Texas?
A home equity loan is a second mortgage that is borrowed against the remaining equity on your house after the first mortgage. The amount of the loan is decided on the property value and your current 1st mortgage balance.
In HEL borrower gets the entire loan in a lump-sum amount. HEL is usually shorter in term compared to 1st mortgage. The guidelines for a home equity loan in Texas vary from that of the other states.
What is the Home Equity Line of credit in Texas?
Unlike the HEL Home Equity Line of Credit (HELOC) is a revolving credit line with a specific limit just like credit cards. This credit line is given to the borrower against the equity in the house.
With the HELOC borrower can choose how much money to withdraw from the allocated credit line.
And will be making the payment only on the amount withdrawn. HELOC is one of the most popular home equity loans in Texas.
How to obtain HEL/HELOC in Texas?
To get a home equity loan in Texas, an individual should have an excellent to good credit history. Also, the loan to value should not exceed 80 % of the property value, which would also include your 1st mortgage.
The rest of the procedure is very similar to refinancing with cash-out. The choice depends on the borrower to opt between a line of credit or a home equity loan.
Why HEL/HELOC?
HEL/HELOC is usually obtained to cover significant expenses such as home repairs, college educations, medical bills, or paying off any unsecured debts with a high interest rate.
Let’s say you have several credit card debts with high interest rates. You can opt for HEL/HELOC and pay off the credit card debts, and get a lower interest rate under one single payment.
To obtain home equity loans in Texas, get in touch with your current bank or your trusted loan officer.
Conclusion
Though this looks like a beneficial and smart financial move, you have to consider your intentions thoroughly before you tap into your equity, as failure to make the payments on HEL/HELOC may risk your property towards foreclosure.
Talking to your loan officer would give you better knowledge about obtaining any of the home equity loans in Texas.
About Sewer Scope Inspection
As a homebuyer, you might need to go through multiple inspections before you decide to buy a new home.
While buying a new home homeowners generally inspect the roof, HVAC, plumbing, and roof.
However, one more important thing to consider for inspection is sewer inspection. In this post, we will understand what sewer scope inspection is in detail.
What Is A Sewer Scope Inspection?
A sewer inspection, also known as sewer scope inspection is very simple. In this, the certified inspector will use a specialized bore scope camera with long cables that are connected to a monitor to record and view videos of your drainage pipelines.
This specialized camera passes through the main drain of the house and the sewer pipe. Inspectors look for visible cracks, blockages, or damages and report structural damage or health hazards to your drainage system.
A sewer scope can take anywhere from a few minutes to 30 minutes, but it depends on the size of your home’s sewer system and the problem.
The certified inspector will then report the results, usually after the inspection. However, the customer will have to wait for the final photo report and final results from the technician to decide what to do next.
Before buying your dream home, you should schedule a plumbing scope inspection and plan to have it inspected regularly as your home ages.
Why Should You Consider Getting Sewer Scope Inspection Done For Your Home?
There are many reasons why you might need a sewer scope conducted. Clogged or leaking drains can cause many health problems. Here are some of the health hazards that live in sewage systems.
Health Hazards
- Harmful gases
- Parasites
- Bacterial infection
- Viruses
- Molds
- Fungal infection
If your sewer system is clogged or leaking under your home, it can affect your and your family’s health.
Structural Harm
A damaged drain can cause structural damage to your home. For example, movement in the sewer pipes under your home can also cause your home to shift. A leaking drain can also be a sign of a home that is shifting or moving. Finally, if your sewer system is affected by tree roots, steps must be taken to prevent tree roots from affecting the foundation of your home.
Below you will find some common consequences of a damaged or worn-out sewer system. It can also be the reason why you need a sewer inspection for your home.
- Foundation problem
- Sinkholes
- Mold problems
- flooding in your house or lawn
When Should You Consider Conducting A Sewer Scope Inspection For Home Purchase?
Before you start looking to buy a new house, it’s good to know what to look for and what the signs are to conduct a sewer inspection before you make an offer.
Here is a short list of common signs that something is wrong or that the sewer system is in danger of being damaged.
- Standing water in your home or space – This can indicate damage to your sewer system or serious blockage.
- Large trees in the yard – One of the most common causes of damage to sewer lines is large tree roots growing around the pipe. Roots can grow around the pipe, narrowing and breaking it or causing small cracks in the pipe that can clog or leak.
- Home is more than 25 years old – Homes built before 1984 may have clay drain pipes that crack or crumble easily. They usually need to be replaced or at least checked to make sure they are working properly.
- If you notice the ground around the home shifting or moving – If the ground around the home appears to be moving, the drain pipes may be damaged. If it is shifted, it means that it has been broken, bent, or damaged and may need expensive repairs. To determine this, look at things like sidewalks and driveways. If the ground surface level with the driveway or sidewalk appears sunken or is piled up above the surface of the concrete, consider getting a sewer inspection done.
Even if you don’t see any of the problems listed above, it’s a good idea to have the sewer inspected for the property that you are planning to buy.
Minor plumbing problems may cause few or no symptoms but can cost thousands of dollars to fix in the future.
Conclusion
The sewer scope inspection will let you know if the property that you are staying in or planning to buy has any blockages or clogs, cracks, damages, type of material used for pipes, tree roots, separation of the pipeline, or any other issues with the drainage system.
Even if you don’t see any issues with the house, you should still consider getting a sewer scope inspection completed.
It is better to have a sewer that is well maintained rather than having an unrepaired one which may add substantial costs in the future.
About Growing Equity Mortgage
As a borrower, there are multiple options to choose from when you are planning to buy a home or refinancing your mortgage. If you take a 30 years conventional fixed rate mortgage your monthly payments (Principal and Interest) are amortized over 30 years.
As you make your payments every month, a portion of your payment goes towards the principal and the rest towards your interest.
In a traditional mortgage, you build equity on your home as you pay down your principal balance every month.
However, there is one program that may help you to build equity faster. In this post, we will understand what Growing-Equity Mortgage is and how it works in detail.
What Is GEM?
GEM, also known as growing equity loan is an alternative type of fixed rate mortgage. The amount paid each month increases over time through an agreed payment plan.
This means that more money is paid towards the principal mortgage balance; as a result, the borrower reduces the term of the loan and pays less interest on the loan. These loans also help build equity faster than traditional mortgages.
GEM finance is a program designed to help homeowners build equity in their homes faster.
With the growing equity loan program, buyers start making regular loan repayments, and after a certain period, the monthly mortgage payment increases.
With GEM finance, you can build equity in your home faster than usual and the loan can be repaid much more quickly.
Most of the equity growth mortgages are typically paid off in just 15 years instead of the regular 30 years.
How Does A GEM Work?
A GEM productively allows the borrower to speed up repayment of their fixed rate loan by scheduling additional payments towards their principal that grow over time.
Apart from paying off the loan early, a growing equity loan helps build equity more quickly that the borrower can use when needed. Growth equity loan payments usually increase annually by up to 5% every year.
There is a condition to GEM financing. As the payment increases each year, the borrower’s income (or ability to pay) must also increase to cover the higher payments.
A GEM mortgage is not to be confused with a graduated-payment mortgage loan. A graduate mortgage loan also has a fixed interest rate and repayments that increase at set intervals.
However, the graduated payment loan has negative amortization. In other words, unlike GEM, the first installments of a graduated mortgage are placed below what is a full amortization payment (it is placed below what is an interest-only payment).
Due to payments lower than regular the graduate mortgage causes negative amortization.
Pros Of Getting A GEM:
One of the big benefits is that you save a huge amount of money in interest. With GEM financing, your mortgage payments will increase over time which will allow you to pay more towards the principal repayment.
The faster you repay the principal, the less interest you will pay on the loan. As a result, you save a significant amount of money over the tenure of your loan.
Another advantage is that you can pay it off faster than the traditional way. Think about what it would be like to pay off a 30-year loan in 15 years.
If you get a GEM, you no longer have to worry about the biggest obligation once it is paid in full.
Another benefit of a GEM loan is that you can build equity in your home more quickly.
You can use your home equity to borrow funds against it in case of emergency. You can use a home equity loan, HELOC, or mortgage refinancing to cover major expenses in the future like paying off your high-interest debts, remodeling, student loans, etc.
If you are using home equity for home improvement purposes, you can deduct the interest from your taxes.
Cons Of Getting A GEM:
The obvious downside to this program is that your mortgage payments will increase over the years.
You’ll start paying off your mortgage with full amortization. Unlike graduate loans, where you start with a small monthly payment and work your way up.
With GEM you start with full payment and increase that amount and end up with high mortgage payments at the end of the loan.
Due to an increase in the monthly mortgage payment, you need to ensure that your income increases at the same or faster rate.
Throughout your career, you should get a raise or find a better-paying job. Many people struggle with this situation because they can’t raise their wages to meet their mortgage payments.
Conclusion
Growing-Equity Mortgage is one of the best options to build your equity and pay off your mortgage faster. If you plan to become mortgage debt free quicker, you can choose GEM financing.
However, if you think that increased payments are something that you might not be able to pay in the future, you might want to consider a regular conventional mortgage.
About Base Pay
When you are looking to take a mortgage to buy a new home or refinance your current mortgage, your lender will qualify you based on a few parameters like loan-to-value, Debt-to-income, and credit score.
To calculate debt to income, the lender would require your monthly debts and your income.
One of the things that your lender will consider while analyzing your income is your base salary. In this post, we will understand what is base pay in detail.
What Does Base Pay Mean?
Base pay, also known as base salary or basic salary, is a specific amount of money paid by an employer to employees in exchange for work performed.
This term does not take into account salary incentives, bonuses, overtime, or any other company remunerations.
When you apply for a job, the employer will offer you basic pay for your specific skill set.
If you accept the offer, your job description may also include additional details about other financial aspects of your future salary.
However, your suggested base salary remains constant. This is usually called an hourly rate, annual basic salary, or basic monthly income.
What Is The Difference Between Base Pay And Total Gross Pay?
Total gross pay refers to an employee’s total compensation, including all bonuses, benefits, insurance, overtime pay, etc.
The basic pay is the minimum fixed amount that an employee is compensated with for the type of work he or she does.
In addition to base salary, other components of compensation are likely to vary from year to year because they are based on many factors, such as business revenue, division performance, individual employee performance, and so on.
Special benefits and bonuses are usually affected based on these factors. When you are applying for a mortgage or refinance your current one, the lender will consider your gross monthly income to calculate the debt-to-income ratio.
However, the variable should also show some consistency so that the lender can take the average of the variable component for the calculation of income.
Who Receives The Basic Pay?
Base pays are typically paid to professional or exempt workers. These are workers who meet the criteria for an exemption from federal overtime laws under the Fair Labor Standards Act (FLSA).
They are usually professionals, managers, administrators, and also computer-related employees who must earn more than $684 per week and pass additional tests related to their job duties to be exempt from overtime pay.
The employee who is salaried is not required to record the number of hours worked and is not paid for overtime work.
This distinguishes it from a non-exempt or hourly employee who is paid by the hour. The overtime is paid to non-exempt employees who work more than forty hours in a week.
How Is Base Pay Calculated?
The base salary is calculated based on the minimum wage rate per hour. The minimum wage rate depends on the employee’s skill set and experience.
To calculate your basic salary every month, you just have to multiply your minimum wage rate by the number of hours you are expected to work for a week, (usually 40 hours) and then multiply it by four.
For example, if your minimum wage rate is $25 per hour then your monthly basic pay would be $25 x 40 = 1,000 x 4= 4,000. In this example, your monthly basic pay would be $4,000.
Conclusion
Basic pay is one of the most important parts of a working individual. To qualify for any credit or loan, if you have good basic pay, you have a higher chance to be qualified for the amount of money that you are looking to borrow.
Your basic salary depends on your skill set, geographical location, industry, etc. You can find the information on base salary in the U.S Bureau Of Labor Statistics
About Force Placed Insurance
When you purchase a real estate property with a mortgage, along with you as a borrower the lender also poses the risk in the purchase transactions.
For a borrower, the risk could be a natural disaster that could damage the property and might need insurance to cover the cost of repairs.
For a lender, it is the non-payment of the mortgage payment that needs to be insured. To lower the risk of both borrower and the bank or the lender force-placed insurance is been used in the mortgage process for a very long time.
In this post, we will understand what force placed insurance is and how it works.
What Is Force-Placed Insurance?
If you are buying a real estate property, you are required to get insurance on the property.
The banks or the lender that is providing the mortgage will require you to have flood, wind, or casualty insurance to get protection against any disasters.
The force-placed insurance comes into the picture when the borrower lets their insurance lapse or does not have any insurance on the property that is being mortgaged.
The lender-placed insurance could be put into force if the borrower fails to make payment on his original insurance, has filed counterfeit claims, or for any other reasons.
The lender will impose this type of insurance to protect their interest in the property in case the borrower’s insurance gets lapsed.
If any of these scenarios occur, the lender’s interest in the property may be at risk. Since the 1960s, most lenders have had an option that permits them to obtain their own homeowner’s insurance.
In case the lender goes for forced placed insurance, the lender is the only beneficiary in case of the claims.
If there is a claim situation the lender may choose to help the homeowner to use the claim proceeding from the lender-placed insurance policy to cover the repair cost.
Risk Financial offers lender exposure and flood coverage designed to provide strong protection for a variety of potential purchase scenarios.
How Does Force-Place Insurance Work?
The cost of the force-placed insurance is paid by the lender up front and it is added to the mortgage loan balance.
The lender-placed insurance has higher premiums compared to the regular homeowner’s policies.
This is because the insurance company has to provide coverage regardless of the risk involved in the property.
In addition, force-placed insurance may provide lower cost coverage compared to regular homeowner’s policies that are available in the market.
The policy will only cover the amount to be paid to the lender, which may not be enough to protect the home in the event of total or partial damage.
This policy also generally does not include liability or personal property coverage.
Since the coverage could be insufficient in most cases, the insurance companies give multiple options to the lenders so that they can extend the coverage.
- Risk management services.
- Replacement coverage for complete damage.
- Options for extraordinary risks such as natural disasters (earthquakes, fire, floods, etc.) and certain liabilities that the companies run into.
- Covering complete portfolios for real estate investors.
- Both residential and commercial property coverage.
Conclusion
The lenders and the banks would require a formal commitment to have sufficient insurance policy coverage for the properties that were mortgaged till the debt is paid.
The force placed insurance plays an important role to protect the lender’s financial interest in the property.
Even if these policies may cost additional money to the borrower, they also bring great benefits to borrowers.
This is the best option if the current insurance has insufficient coverage or laps of the current insurance and provides protection for the property for both the borrower and the lender.
Home Equity Loan Requirements 2022
Your home’s equity is one of the biggest sources of money that you have. And one of the ways to access that money is through a home equity loan.
Many people are not aware of the home equity loan and how they can get one. In this post, we will learn what the home equity loan requirements are.
What Is A Home equity Loan?
A home equity loan is basically a loan that you can get against your part of a share in your home which is called equity.
Equity is your share of the property after subtracting your mortgage or any other liens that you have on your property.
Home Equity Loan Requirements Or How To Get A Home Equity Loan
- The first home equity loan requirement is the credit score. The credit score for home equity loans required by the lenders is at least 620. Some of the lenders may also be able to give home equity loans for borrowers below 620 credit scores. Home equity loans are generally going to people who have a good or great credit score. If you want to get the best interest rates on a home equity loan your credit score needs to be above 720. This is still going to be depending on your credit report and the lender that you are going to work with.
- Many people have a very basic question of “how much home equity loan can I get?” The total of a home equity loan is entirely dependent on that amount of equity you have at this time. Most of the lenders can consider the home equity loan for up to 85% of your property value which also includes your primary mortgage. The home equity loan requirement for LTV is 85%. When you buy your home you put some down payment which is part of your equity and all the monthly payment that you make on your mortgage over the years also adds up to your equity.
- The other home equity loan requirement is the debt to income ratio. To qualify for a home equity loan the maximum debt to income ratio required is 43%. This means you can be qualified to get a home equity loan if your overall monthly debts payment does not exceed 43% of your overall monthly income.
Conclusion
The biggest problem with people getting a home equity loan is using it improperly. You might want to opt for a home equity loan if you really need it and you have planned your way to pay it off.
Some of the good reasons why people go for home equity loans are to remodel their home, which adds value to their property, pay off high-interest credit cards, and pay for tuition for higher studies.
Many experts suggest that a home equity loan is one of the best financial tools if used wisely.
Even if you qualify according to the home equity loan requirements, and get the loan, failing to make the payments on time could result in you losing your house.
Today in this post we will learn how to calculate home equity and understand the list of factors involved and superior guide to build equity in your home.
Introduction To Home Equity
If a person plans to sell or refinance their home it is important for them to understand the amount of equity they have in their home.
When selling a house, the ultimate goal of everyone is to profit from its equity. In real estate, the term home equity means a home’s value relative to what’s owed on it.
If a home is sold for more than what one owes, it is positive equity. Likewise when the home is sold for less than what one owes, then they are in a negative equity situation.
It is obvious that the ideal time to sell a house is when one can make a profit.
How To Calculate Home Equity?
The difference between the appraised value of a home and the amount one still owes on their mortgage is the home equity.
The amount of equity one has in the home influences their finances in many ways – like whether they need to pay private mortgage insurance, what financing options are available for them, etc.
Home equity = Current appraised value – mortgage balance.
How Much Equity Does The Home Have?
To identify their home equity one needs to deduct the amount they owe on all loans secured by their house with the home’s appraised value.
If the appraised value of the home is lower than what they owe on their mortgage, then it is an underwater mortgage meaning they would not have any equity in their home.
How Does Your Loan Get Affected By The Loan-To-Value Ratio?
To make a decision about loans and financing the most common measure lenders may use is the loan-to-value ratio (LTV).
When a borrower first applies for a mortgage, this equation compares the amount of the loan they are expecting to the home’s value.
If the borrower has a current mortgage, their LTV ratio would be based on their loan balance.
LTV ratio is the deciding factor if a customer is required to have private mortgage insurance (PMI) or if they can qualify to refinance.
To know their LTV ratio, a homeowner should divide their current loan balance (which can be found on their monthly statement or online account) with the home’s appraised value. to convert it to a percentage that number should be multiplied by 100.
Loan to value ratio = current loan balance / current appraised value X 100
To determine one’s loan to value ratio it is ideal to get a professional appraisal of the home done.
A lender can arrange for a qualified appraiser to come to your home and assess its value to get an on-site appraisal done.
To determine what your home is worth, a home appraisal is the most accurate way, but there are other free online tools that can also provide an estimate of your home’s value.
What Are Private Mortgage Insurance And Ways To Cancel Them?
In the event a homeowner defaults on their mortgage then PMI which is actual insurance protects a lender.
Who needs to pay PMI? If a borrower’s down payment was less than 20 % of the home’s purchase price, then the lender may have required private mortgage insurance on their original mortgage.
The requirement of private mortgage insurance exists only when the loan-to-value ratio is above a certain threshold.
When a home’s LTV ratio is 78 % or lower and if certain requirements are met then the Homeowners Protection Act requires lenders to automatically cancel PMI.
When the loan balance reaches 78 % of a home’s original appraised value then this cancellation is often preplanned.
However, if a borrower has made extra payments then they have the right to request their lender to cancel the PMI if their LTV ratio drops below 80 % before the schedule.
The Calculation For A Home Equity Line Of Credit
If a borrower is considering a home equity loan or line of credit, then their combined loan-to-value ratio (CLTV) is another important calculation.
The CLTV ratio evaluates the value of the borrower’s home to the combined total of the loans secured by it, counting the loan or line of credit that they are looking at.
A combined loan to value ratio (CLTV) = Current loan balance + HELOC / Current appraised value.
Even though the CLTV ratio requirement may vary from lender to lender but most lenders require the CLTV ratio to be below 85 % to qualify for a home equity line of credit.
But the home’s value can fluctuate over time so if the value drops, they may not be eligible for a home equity loan or line of credit, or they may end up unsettled more than what their home is worth.
How Can One Increase Their Equity?
Equity can be built by paying down the loan’s principal and lowering one’s loan-to-value ratio.
If the payments are amortized meaning if it is based on scheduled monthly payments by which one repays their loan in full by the end of its term then paying it regularly without default.
To lower one LTV ratio and increase their equity more quickly, a borrower can consider paying more than the required mortgage payment each month.
This helps in finishing the loan balance faster. However one needs to make sure that the loan doesn’t carry any prepayment penalties.
A borrower can also protect the value of their home by keeping it well-maintained. Making improvements to the home may also increase its value and thereby increase the home equity.
Before investing in any renovations it is suggested that the borrower consults an appraiser or real estate professional to get a better estimate of how it will impact the value of a home.
Conclusion
Home equity means a home’s value relative to what’s owed on it. It is important to understand that immaterial of any changes sometimes economic conditions can affect the home’s value.
If home prices boost, the LTV ratio could go down, and thereby increasing the home equity, the falling home prices could terminate the value of any improvements that a borrower would have made.
Using Home Equity Loan to Payoff Credit Cards Debt
You may be struggling to bring your debt level down if you have large outstanding balances on your credit cards.
If you have been able to make only minimum monthly payments it could take years, or maybe decades, to zero out your cards.
If you own your home, you have the option of taking out a home equity loan to payoff credit cards debt.
But before taking any action always consider the risks associated and look out for other possible alternatives.
What is a Home Equity Loan?
Your home has accumulated equity over the years so a home equity loan allows you to borrow against that equity.
For instance, if the current worth of your home is $300,000 and you owe $200,000 on your mortgage, you have an equity of $100,000.
Based on your equity a bank, credit union, or other lenders may be willing to issue a home equity loan equal to some percentage of it.
Factors, such as your credit score will decide how much you can borrow and whether you can get a loan at all in the first place.
Pros of using a home equity loan to pay off debt?
The main advantage of using a home equity loan to pay off credit card debt is that you’ll secure a much lower interest rate than what you are paying on your credit cards.
For instance, the average interest rate on a home equity loan is average around 5 %, while the average credit card could be ranging more than 19%.
When you use a home equity loan to pay off credit cards, it will also simplify your life, where you will have just one bill to pay each month instead of several bills.
Earlier the interest you paid on a home equity loan was tax-deductible, which has been suspended, at least for the next few years.
But credit card interest was not deductible. Because of the Tax Cuts and Jobs Act of 2017, only if you use the loan to either buy, build, or improve your home that secures the loan then the interest on home equity loans was deductible.
Now that provision is put on hold for at least until 2026.
Cons of using a home equity loan for paying off credit card debt
The major snag of taking out a home equity loan to pay off debt is that your home would be on the line.
As your home serves as collateral for the loan, the lender could seize and sell it if you are unable to pay back your loan.
You’ll also face serious financial consequences, especially in your credit score when you can’t repay credit card debt.
As credit card debt is not secured by your home, you’ll be at far less risk of losing your home.
You can keep your principal residence even if you have to declare bankruptcy because of your debts.
Is a Home Equity Loan the Answer?
A home equity loan may be a good way to pay off high-interest credit card debt, provided everything goes as per the plan. It can also cost you your home in a worst-case scenario.
Conclusion
One alternative to be debt-free is to use a home equity loan to pay off credit cards.
Compared to most credit cards a home equity loan generally charges much lower interest rates.
The downside of using a home equity loan to pay off credit cards is that you could lose your home if you are unable to repay it.
To decide if it’s a practical option, you need to identify how strong or how the week is your current financial situation.
If you have a secure job or a means of a consistent flow of income and are confident that you’ll have no problem, keeping up with the payments, it could be ideal for you.
But if your job is not dependable and you have no other financial resources then a home equity loan could be a risky option.
About Home Equity loan Calculation
Most people usually, know what their home equity is. But if are not too clear.
Today in this topic we will guide you to understand how home equity works and home equity loan calculations.
Home equity is especially required if you are looking to refinance a mortgage or borrow money against your home.
Knowing how much home equity you have
The difference between the current market value of your home and the total sum of debts of your primary mortgage registered against it will be your home equity value.
Depending on how much equity you have on your home, you will get credit on a home equity loan.
Supposing the home is worth $250,000 and the mortgage you owe is $150,000.
Then just by subtracting the remaining mortgage from the home’s value, and you’ll come up with the equity of your home as $100,000.
Home equity loan calculation
Many lenders will not let you borrow against the full amount of your home equity.
Depending on your lender, your credit, and your income, you are generally allowed to borrow a maximum of 80% to 90% of the available equity.
So, with a home equity of $100,000, you could get a home equity line of credit (HELOC) of $80,000 to $90,000.
Many borrowers are stuck with confusion about how to calculate home equity loans.
With a 30-year mortgage if you have completed five years into your home.
And the market value of your house is at $250,000 according to a recent appraisal or assessment, and on the original $200,000 loan if you also still have $195,000 left.
Remember, most of your early home mortgage payments go toward paying down the interest.
So you will have $55,000 in-home equity provided there are no other obligations tied to the house.
So the current market value of $250,000 minus the $195,000 in debt.
Or to determine your home equity percentage you can also divide home equity by the market value. In the following example, the home equity percentage is 22% that is a result of ($55,000 ÷ $250,000 = .22).
So along with your mortgage now, if you also had taken out a home equity loan of $40,000, then the total debt on the home instead of $195,000 is $235,000.
So the total equity of your home equity changes to just $15,000, dropping to a 6% percentage.
Transaction costs
Usually when tapping into your home equity there a cost associated with it. In the United States, when you are selling the house the total closing costs associated is anywhere between 2% and 5%.
Though buyers pay many of these charges, they could use these fees to rationalize and negotiate for a lower sale price.
When taking out a home equity loan, you will need to pay some type of loan origination fee.
For the second mortgages and home equity lines of credit (HELOCs) the interest rates are generally higher than for the original mortgage.
After deducting all these costs, the usable amount of home equity is lower compared to the amount you have in theory.
The Loan-to-Value Ratio
The loan-to-value (LTV) ratio is another way to express equity in your home. When you divide the remaining loan balance with the current market value then you get the calculation of LTV.
While in our earlier calculation your home equity percentage was 22% so your LTV will be 78%.
When you add your home equity loan of $40,000 then your LTV will climb up to 94%.
A high LTV suggests you could have too much leverage and would not be able to pay back your loans so borrowers with high LTV are not approved by lenders.
When the market value of a home changes LTV and home equity values also fluctuate.
Conclusion
The value of your ownership stake in your home is called home equity. How to calculate a home equity loan?
How much will you get with your home equity loan calculation is identified by subtracting your outstanding mortgage from the property’s current market value.
Usually, you might be able to borrow between 80% and 90% of your available equity.
But many times lenders will allow you to borrow against the full amount of your home equity.
Due to the coronavirus pandemic, many lenders restricted access to home equity and raised their credit score requirements, for home equity lines of credit (HELOCs).