Home equity: The basics of a home equity loan

by Martine Micozzi 05/26/2024

Sometimes, loans can be difficult to calculate. Home equity loan figures are no different, but they don’t have to be. All you need is a little understanding of the basics and a reliable equity calculator. Having a trustworthy loan officer available is also a highly valuable resource.

Here’s a quick guide to calculating your home equity loan:

What is home equity?

Home equity means the amount of your home that you own outright. This is typically considered to be the amount of your mortgage you’ve already paid, which is often a driving factor for those searching for short mortgage terms.

Say you’ve purchased a home at $250,000. You’ve already paid 50% of your mortgage, leaving you with $125,000 in home equity, the amount you’ve paid into your home due to your monthly mortgage payments.

What is a home equity loan?

When someone refers to a home equity line of credit or home equity loans, they’re referring to a loan that you take out against your current home equity. These loans are typically taken out for a variety of reasons, like large home improvement projects, home refinancing, finance consolidation, etc.

What else should I know?

Calculating your home equity loan or facets of your loan may seem fairly cut and dry, but there are a few aspects to remember. For example, you’ll need to know your home’s current market value (or appraised value) and the outstanding balance left on your mortgage loan.

Another important facet to consider is your loan-to-value ratio. This number helps lenders determine your interest rates and, in turn, your monthly payments. Your LTV can be calculated by inputting the full mortgage amount and dividing it by the amount the property is appraised for.

So, if you have a property that’s been appraised for $200,000, and you made a down payment of $20,000 (10% of the appraised value) resulting in your mortgage loan being $180,000, your equation would be:

180,000/200,000 = .9 or 90% (LTV)

While 80% or lower is thought to be best, having an LTV of 90% or more does not immediately discredit you as an applicant. You just may face higher interest rates if you meet the rest of your preferred lender’s requirements.

These are just a few simple, yet heavily important, factors in determining home equity loans and home equity lines of credit. However, there will typically be specifics based on your specific circumstances and your lender’s requirements.